- Lenders usually charge business loan fees on top of interest.
- It may cost money to make money, but small business owners should still understand all the possible loan fees to make sure a specific funding option makes financial sense for their business.
- This article breaks down the most common finance fees, how to understand total loan cost, examples of business loans with no origination fee, and how to find the best business loan to help you make the best financing decisions for your company.
Common Fees for Small Business Loans
Business lenders can charge a variety of fees in addition to the interest rate, which can significantly impact the total cost of borrowing. The specific fees charged can vary depending on the type of business loan, the lender, and the terms of the loan.
Here are some common fees associated with business loans:
This is a one-time fee charged by the lender for processing and underwriting the loan application. It can also be called an underwriting fee. It’s typically a percentage of the loan amount and can range from 1% to 6% or more. This fee is usually deducted from the loan proceeds.
Lenders may charge a fee for processing the loan paperwork, verifying your business information, and other administrative tasks. This fee is typically included in the overall cost of the loan.
Late payment fee
If you miss a scheduled loan payment, you may be subject to a late payment fee. This fee can vary among lenders but is designed to incentivize borrowers to make payments on time.
Some business loans come with prepayment penalties, which is charged to the loan if you repay it before the agreed-upon term. These penalties are meant to compensate the lender for the interest they would have earned had you continued to make payments as scheduled.
For business lines of credit or business credit cards, an annual fee may be charged for the use of the credit line.
If you apply for a loan with collateral, the lender may have to appraise the item to find its value. Appraisals typically cost money, so that charge would be included in the overall loan cost.
If you’re applying for a government-backed business loan, such as a loan from the Small Business Administration (SBA), there may be guarantee fees associated with the loan. These fees are typically a percentage of the guaranteed portion of the loan. The exact cost depends on factors like the loan amount and the SBA program being used.
Also called a loan document fee, lenders may charge this to prepare and provide loan documentation, like promissory notes and security agreements.
Some lenders charge a fee for servicing the loan, including tasks like sending monthly statements, processing payments, and managing the loan account.
It’s important to carefully review the terms and conditions of any business loan you’re considering to understand all the fees involved. The total cost of the loan, including both interest and fees, should be a key factor in your decision-making process. Additionally, you can consider negotiating certain fees with the lender or exploring alternative lenders to find the most cost-effective financing solution for your business.
A draw fee usually applies to a business line of credit, and it’s a charge for requesting to draw money out of the line of credit. The fee is usually a percentage of the total amount you borrow.
What Are Interest Rates?
Interest rates on business loans refer to the cost of borrowing money for business purposes. These rates are the percentage of the loan amount that a business must pay to the lender in addition to the principal amount borrowed. The interest rate is a key factor in determining the overall cost of the loan.
Business loan interest rates can vary significantly based on several factors, including:
- Type of funding: The type of business loan you’re applying for can influence the eligibility requirements and the interest rate. Common types of small business loans include term loans, business lines of credit, SBA loans, equipment financing, invoice factoring, and commercial mortgages. Each type of loan may have its own typical interest rate range. Some business financing, like business credit cards, come with variable interest rates, which means the rates can change over time.
- Lender: Different lenders, such as traditional banks, credit unions, online lenders, and alternative financing companies, may offer different interest rates. Traditional lenders like banks often have stricter qualification requirements but may offer lower interest rates, while online lenders may have more lenient requirements but charge higher rates to compensate for the added risk of lending out working capital.
- Annual revenue: Your cash flow and profitability factor heavily into your loan application as well as the interest rate you can receive. The higher your revenue, the less risky you may appear to lenders. Lenders may then be more willing to offer you a low interest rate.
- Creditworthiness: The creditworthiness of your business plays a significant role in determining the interest rate you’re offered. Lenders assess your credit history, business financials, and credit score to determine the level of risk associated with lending to your business. Businesses with strong credit profiles and owners with strong personal credit scores typically receive lower interest rates. Check all your credit reports in one place with Nav Prime.
- Loan term: The length of the loan term can affect the interest rate. Short-term loans often have higher interest rates than long-term loans, because lenders assume more risk with shorter repayment terms.
- Market conditions: Overall economic conditions, including the state of the financial markets and central bank policies, can influence interest rates and business lending flexibility. In times of economic uncertainty, interest rates may increase.
- Collateral: Secured loans, which are backed by collateral (such as real estate or equipment), may have lower interest rates compared to unsecured loans, because the collateral reduces the lender’s risk.
It’s essential for businesses to shop around and compare offers from different lenders to find the most favorable interest rate for their specific needs. Additionally, understanding the total cost of the loan, including any fees and other terms, is crucial when looking at loan options.
What Is APR?
The annual percentage rate (APR) on business loans is a standardized measure used for financing. It represents a more accurate cost of borrowing money for business purposes over the course of a year than the interest rate alone. This is because it includes the interest rate charged by the lender plus any associated fees and costs that the borrower may have to pay, like the origination fees or guarantee fees for government-backed loans.
Calculating APR allows borrowers to compare the true cost of different loan offers from various lenders, helping them make more informed decisions about which loan option is the most cost-effective for their business needs. It’s important to carefully review the terms and conditions of a business loan agreement to understand all the fees and costs included in the APR and how they’ll impact the total cost of borrowing.
What Is a Factor Rate?
A factor rate, also known as a “buy rate” or “factor,” is an alternative method of expressing the cost of borrowing in a business loan. Typically, a factor rate is used for business cash advances or merchant cash advances, as well as some short-term financing options. It differs from the traditional interest rate in several key ways:
- Calculation: Unlike interest rates, which are expressed as percentages of the loan amount and compound over time, factor rates are represented as decimals or fractions of the loan amount. For example, a factor rate of 1.2 means that you would repay 1.2 times the borrowed amount.
- Fixed cost: Factor rates are fixed costs. The total repayment amount is determined upfront, and it doesn’t change regardless of how quickly you repay the loan. This differs from traditional loans with interest rates, where the interest cost decreases as you pay down the principal balance.
- Repayment structure: Instead of monthly payments, loans with factor rates are typically repaid through daily or weekly deductions from the business’s credit card sales or bank account. The repayment amount is a fixed percentage of daily or weekly revenue until the total amount due (the factor rate multiplied by the loan amount) is repaid.
Here’s an example to illustrate how factor rates work:
Suppose you borrow $10,000 with a factor rate of 1.2. The total amount you would need to repay is calculated as follows:
Total Repayment Amount = Loan Amount x Factor Rate
$10,000 x 1.2 = $12,000
In this case, you would need to repay a total of $12,000. This fixed amount is typically paid back through daily or weekly deductions from your business’s revenue until the full $12,000 is repaid.
Factor rates can be higher than traditional interest rates when expressed as a percentage. This can make them appear expensive. However, they are often used for short-term financing solutions. Businesses that may not qualify for traditional loans due to credit issues or lack of collateral may find them more accessible.
Do Business Loans Have Admin Fees & What Are They?
Yes, many business loans can have administrative fees. These fees are separate from the interest rate and are intended to cover the costs associated with processing and managing the loan application and servicing the loan.
The specific admin fees associated with a business loan can vary depending on the lender and the type of loan, but here are some common examples:
- Application fee: Some lenders charge an upfront application fee when you apply for a business loan. This fee covers the cost of reviewing your loan application and conducting credit checks. Application fees are typically non-refundable, whether your loan is approved or not.
- Origination fee: An origination fee is charged by the lender for processing and underwriting the loan. It’s usually a percentage of the loan amount and is deducted from the loan proceeds when the loan is disbursed.
- Appraisal fee: If you’re putting down collateral on a loan, the lender may have to pay to appraise the property. That fee would be written into your loan.
- SBA guarantee fee: If you’re applying for a government-backed loan, such as an SBA loan, there may be guarantee fees associated with the loan. These fees help fund the loan guarantee program.
- Late payment fee: While not an admin fee in the traditional sense, late payment fees are a common charge if you miss a scheduled loan payment.
It’s important for business owners to carefully review the terms and conditions of any business loan they are considering to understand all the associated fees. The total cost of the loan, including both interest and fees, should be a key consideration when evaluating loan options. Additionally, some lenders may be willing to negotiate or waive certain fees, so it’s a good idea to discuss the fee structure with the lender and explore whether there is room for flexibility in your loan agreement.
Do Business Loans Have Origination Fees?
Business loans can have origination fees. Origination fees are common in various types of business loans, and they are charged by the lender to cover the cost of processing and underwriting the loan application. These fees are typically a percentage of the loan amount and are deducted from the loan proceeds when the loan is disbursed to the borrower.
Origination fees are one-time charges and can vary widely depending on the lender and the type of business loan. The percentage typically ranges from 1% to 6% or more of the loan amount. For example, if you were to borrow $100,000 with a 3% origination fee, the fee would amount to $3,000, and you would receive $97,000 in loan funds.
It’s important for business owners to be aware of origination fees when considering a business loan, as they add to the overall cost of borrowing. When comparing loan offers from different lenders, it’s essential to take into account not only the interest rate but also any associated fees, including origination fees, to determine the total cost of the loan.
Online Loans With No Origination Fee
Not all small business lenders charge an origination fee, especially those offering online loan products. Online loans can be attractive because they often don’t come with this upfront cost, making them a potentially more cost-effective borrowing option. Keep in mind that eligibility criteria, interest rates, and terms can vary among lenders, so it’s important to compare multiple loan offers to find the one that best suits your needs.
Here are some online loans that may not charge origination fees:
This article was originally written on November 8, 2023.