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When you take out a small business loan, you know you'll need to pay back the principal (the amount you are borrowing) plus interest. What you may not be totally prepared for are the additional fees that often get tacked on to the cost of a small business loan.Typically, lenders will charge fees to cover the different costs associated with making and servicing your loan. Which fees may get added to your loan will depend on the lender and the type of loan you’re looking for. Below, we’ll walk you through some of the most common small business loan fees, plus offer tips on how to compare small business loans apples to apples so you can make the best borrowing decision for your business.
What Are the Fees Associated With Business Loans?
Because fees can inflate the total cost of your loan, it’s important to find out what extras may get added before you apply for a small business loan. Lenders also need to be transparent about what each fee covers and explain any that you don’t understand.Below are some common fees associated with business loans. Some are universal, while others are specific to certain types of business loans or situations and may not apply to your particular loan product.
Origination Fees
Business loan origination fees cover the costs associated with processing your small business loan application. It may be a flat fee or a percentage of the loan amount. In some cases, this fee is tacked onto the loan amount, which means you’ll pay interest on the fee.
Application Fees
Lenders sometimes charge a fee for processing your loan application, which means you are getting charged just to apply. This fee is owed whether or not you are approved for the loan or decide to work with that particular lender. Fortunately, many business lenders (such as banks and online lenders) do not charge application fees. You may also be able to avoid application fees by using a loan broker.
Credit Report Fees
If the lender is charged a fee to pull a credit report on a borrower, they often pass that fee on to the borrower. The fee amount varies, but usually runs between $10 and $20.
Appraisal Fees
If you are putting up an asset as collateral, the lender will likely require an appraisal. An appraisal fee is the cost of getting a professional opinion on the value of the asset, whether it’s equipment or property. Even if what you’re purchasing with the loan is acting as collateral, it must be appraised. Banks often prefer to work with their own appraisers and will likely charge you a fee for their services.
Closing Fees
Most often seen with commercial mortgages, closing fees (or costs) generally refer to all the various charges for processing your loan, from origination fees to processing fees. Rather than listing them separately, some lenders may just lump them together under one fee labeled “closing costs.” To see a full breakdown of all costs, you can request an itemized list.
Draw Fees
A draw fee is similar to an origination fee but only applies to business lines of credit. This fee is often expressed as a percentage of any amount borrowed and only gets deducted when you’ve requested funds from your line of credit.
Invoice Factoring Fees
Invoice factoring is a financing method that allows businesses to sell unpaid customer invoices in their accounts. The lender pays the business a portion of each invoice, giving the business a quick infusion of cash. When the lender receives payment from the customers for the invoices, it pays the business the balance of the invoice minus their “invoice factoring fee.” This may be charged on a percentage basis, or it could be a flat fee. This is how the lender makes money on the loan.
Referral Fees
Loan brokers and lending platforms refer your application to multiple lenders who then compete for your business. In some cases, they might charge you a referral fee for this service. This upfront cost is not associated with the actual lender.
Packaging Fees
The process of putting a loan application together and making sure it is complete can be time consuming. Some brokers and lending platforms may charge you a “packaging fee” for doing this on your behalf.
Underwriting Fees
Business loan underwriting is a review process in which all the information submitted in a loan application is verified. An underwriter will also evaluate the loan’s potential profitability and risk on behalf of the lender. The underwriting fee pays for the underwriter’s services. Borrowers may be charged a flat fee or a percentage of the loan amount.
Unsuccessful Payment Fees
If you make a payment on your loan, but it bounces due to insufficient funds in your account, you may get hit with an “unsuccessful payment” or “non-sufficient funds” (or NSF) fee. Amounts vary with each lender. While you likely don’t plan on bouncing any checks or automatic withdrawals, if one lender charges a substantially higher NSF fee than another, you may want to take it into consideration when deciding who to work with.
Wire Transfer Fees
When you receive a loan, the lender will typically send the money to your bank account via Automated Clearing House (ACH), which can take one to three days. The lender might, however, give you the option of wiring your funds via a bank wire transfer, which is faster. This method is also more expensive, and you will likely be required to pick up the cost.
Check Fees
Making loan payments by check can result in a “check processing fee.” That’s because it usually costs banks more to process check payments than automatic withdrawals. You can avoid this fee by setting up automatic payments through your checking account.
SBA 7(a) Loan Guarantee Fees
The Small Business Administration (SBA) promises lenders who provide SBA-backed loans that they will get 75% to 85% of the loan back, even if the borrower defaults on the loan. The SBA typically charges borrowers a 2% to 3.7% fee for offering this guarantee.
Monthly Administrative Fees
Some lenders charge a monthly administration or processing fee for managing the loan. Service fees are often billed monthly or according to the loan repayment schedule, and may be charged as a percentage of the payment. Some lenders, however, may charge a one-time service fee, which would be a percentage of the total loan amount.
Annual Fees
This fee is often associated with a business line of credit. Some lenders charge an annual fee to keep your line of credit open and active.
Late Payment Fees
Late payment fees are practically universal in the lending world. Some lenders charge a flat fee, while others charge a percentage of the late payment. You can avoid this fee, however, by making your payments on or before the payment due date.
Prepayment Fees
Lenders make their money on loans by charging interest. So, if you pay your loan off ahead of schedule, it means the lender won’t make as much in interest. To help compensate, some lenders charge a prepayment fee or penalty. Many lenders, however, do not charge prepayment fees.
Other Possible Fees
Below are some other possible fees you may encounter:
Unused line fees This could be charged if you have a line of credit available to you but don’t use it each month. It’s designed to encourage account holders to use the credit line the following month.
Lockbox fees This can come up if an account holder makes a payment by depositing a check into a lockbox that is provided to them by their lender.
Collection and overdue fees If you're very late with a payment (called defaulting on your loan), you may see “collection and overdue fee” on top of a late payment fee. This fee pays for any additional steps the lender has to take to acquire payment.
Why Are All of These Fees Charged?
Lenders charge fees for a variety of reasons. In some cases, they use fees to encourage borrowers to make payments a certain way (meaning on time and/or online). In other cases, they use fees to help them recoup any amounts charged to them by other parties (such as “wire transfer fees”). Lenders also charge fees in order to pay in-house employees for their services (such as underwriters) and to make sure a loan is profitable (as with “prepayment fees”).
Which Fees Can Be Avoided?
You can avoid late payment fees by making all of your payments on time. You can also avoid unsuccessful payment (or NSF) fees by ensuring you have the right amount of money in your bank account before making each payment. Another way to avoid extra fees is to make your loan payments in the method preferred by your lender, such as through autopay.Many other fees can be avoided simply by shopping around and comparing fees when you’re looking for a small business loan.
Why Paying Attention to Fees Is Important
Fees can add a significant additional cost to your loan, so it’s important to know exactly what you will be paying on top of interest in order to get the true cost of a loan. This also enables you to compare loans apple-to-apples.Fortunately, lenders will typically provide an annual percentage rate (APR) for their loans. The APR provides a complete picture of the annual cost of the loan to the borrower, including interest rate and fees (like origination fees and packaging fees). A loan’s APR won’t include fees that only activate in certain circumstances (such as a late payment fee or prepayment penalty), however. Since these fees can also impact the cost of your loan and make one borrower stand out from another, it can be a good idea to ask lenders about potential additional fees up front.
The Takeaway
If you’re thinking about getting a small business loan to launch or expand your business, it’s important to understand all the costs involved. On top of what you borrow (the principal amount), lenders charge interest, as well as fees.Depending on the lender, the terms of the loan, and your qualifications, each loan you apply for may have a different set of fees. To make sure you’re comparing loans applet-to-apples, it’s a good idea to take a look at the APR for each loan. In addition, you may want to ask lenders when and how you will be charged additional fees not included in the APR.If the process of shopping for and comparing loan products feel a little overwhelming, Lantern by SoFi can help. With our online tool, you can review and compare small business loans that meet your needs and qualifications side-by-side with no obligation – or fees.
Frequently Asked Questions
Which business loan fees are most common?
Do business loan fee amounts depend on loan amount?
Do business loans have closing costs?
What happens if you don't keep track of business loan fees?
Are business loan fees tax deductible?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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About the Author
Lauren Ward
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
