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When you apply for a business loan from a bank or alternative lender, it can be overwhelming to decipher all the different fees you may be charged. Below, we cover some of the most common fees you’ll encounter when taking out a business loan.
Types of Business Loan Fees
Most lenders, whether they are banks or alternative lenders, will charge a variety of fees in addition to interest on a loan. We've compiled a list of the major types of fees associated with business loan and financing products.
Origination fee: This is a fee charged for processing the loan application and approval, including verifying a borrower’s information. Origination fees may be charged as a flat fee (e.g., $350) or a percentage of the loan amount. If it’s charged as a percentage-based fee, it will typically be between 1% and 6% of the loan amount. Sometimes the origination fee is included in the total loan amount, meaning the borrower is essentially borrowing the fee and repaying it with interest.
Service or processing fees: Over the lifetime of a loan, your lender will perform a variety of activities, such as customer service or billing, to manage and administrate the loan. A service or processing fee is used to cover the cost of these expenses. Service fees are frequently billed monthly or according to the loan repayment schedule, but some lenders may only charge a one-time service fee. Service fees are usually charged as a percentage of payment amount (if billed regularly) or of the total loan amount (if one-time).
Prepayment penalty: Prepayment penalties are charged for prepaying on a loan balance. Prepayment penalties may be included in the loan contract as a way to protect the lender from the loss of paid interest arising from prepayment or early payment. Many lenders, such as Fundation, do not charge prepayment fees.
Referral fee: If you apply for a business loan through a lending platform or marketplace, you may be charged a referral fee for the lending platform "referring" your application to a lender. For example, SmartBiz is an online lending platform that offers SBA loans. SmartBiz does not lend to borrowers directly, but instead connects applicants with partnering banks. Since SmartBiz refers applicants to one of its partners, they charge a referral fee to the borrower.
Packaging fee: Sometimes an optional service, the packaging of a loan refers to the preparation of the loan application (e.g., relevant financial statements, planned use of funds) so that the lender can review it. If you borrow through a lending platform, this fee is frequently standard, as the lending platform helps you prepare your loan application before it is sent to lenders for review.
SBA guarantee fee: This is a fee charged by the Small Business Administration for all 7(a) loans it guarantees (the SBA will guarantee loans up to 85% of the loan amount). All SBA lenders are required to pay this fee (if applicable), and lenders have the option of passing this fee onto their borrowers. The guarantee fee is based on the loan’s repayment terms and the dollar amount guaranteed, not the total value of the loan. For loans under $150,000, there is no guarantee fee. For loans over $150,000 with terms of one year or less, the fee is 0.25% of the guaranteed portion. For loans with terms longer than one year, the fee is 3% for loan amounts ranging from $150,000 to $700,000 and 3.5% for loans over $700,000. An additional 0.25% is charged for any guaranteed portion of more than $1 million.
Non-sufficient funds (NSF) and unsuccessful payment fee: These fees are assessed if a loan payment is unsuccessful—this normally happens when the borrower’s bank account does not have enough money to cover the amount that is being withdrawn. NSF and unsuccessful payment fees are generally flat fees, ranging from $15 to $35 per unsuccessful payment.
Late payment fee: This fee is self-explanatory—it’s charged when a loan payment is made past its due date. A late payment fee may be either a flat fee, frequently around $10 to $35, or a percentage of the payment amount or outstanding balance (often 2% - 5%).
Wire transfer fee: Commonly a flat fee, a wire transfer fee is charged when a borrower uses a wire transfer to make a loan payment. The typical fee ranges from $10 to $20 per wire transfer.
Payment by check fee: This fee is charged when a borrower makes a loan payment by check. It’s usually charged as a flat fee, generally around $10 to $20 per payment by check.
Other common fees: You may also see other loan fees such as documentation fees, monthly or weekly fees and invoice factoring fees. Some of the fees, such as monthly, weekly, invoice factoring, fixed loan or line fees, can be thought as similar to the interest rate on the loan. Other fees may be the same as one of the fees listed above, just under a different name. The best way to understand each fee associated with a loan is to thoroughly read the loan offer and contract.
Why Fees Matter
Depending on the lender, the terms of the loan and your qualifications as a borrower, each loan you apply for may have a different set of fees. Normally, this would make comparing loan offers difficult. However, most lenders will provide an annual percentage rate (APR) for their loan products. APRs provide a complete picture of the annual cost of the loan to the borrower, including the interest rate and fees charged (e.g., origination fee, packaging fee).
It's important to note that when lenders calculate an APR, they assume borrowers make payments on time and in full, meaning late payment, NSF or similar fees are not included in an APR. APRs make it easy for borrowers to make apples-to-apples comparison between loan offers and are a good starting point for evaluating a loan offer.
Another important consideration to make is when and how you will be charged additional fees not included in the APR. For example, a bank will not charge a late payment fee unless you make a late payment. The best way to avoid these additional fees is to make your loan payments on time, in full and in the method preferred by your lender (e.g., automatic withdrawal).
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