A Guide for Understanding Business Loan Fees
When shopping around for a business loan, you likely look first at the interest rate a bank or lender would give you. The interest rate is a percentage charged on the loan’s capital. Essentially, it is what you pay for the privilege of using the bank’s money. But the interest rate is not your only cost when taking out a loan. The fees that you pay on a loan will impact everything from your up-front loan costs to your monthly payment.
Banks, traditional lenders and alternative lenders will all charge fees on a business loan. Sometimes these fees are to recoup their costs in processing a loan application and underwriting. Whatever the reason for charging them, a smart borrower should pay close attention to these fees.
An application fee is a flat fee that lenders charge to assess your loan application. It is typically paid upfront. This fee will be charged whether or not you are approved for a loan, so think carefully as assess your odds of being approved before submitting an application with a lender.
The origination fee is one of the first types of fees you are likely to encounter. It is either a flat fee, such as $400, or a percentage of the loan’s total amount, which the bank charges to a potential borrower. It is meant to cover the costs of processing your loan application and approval, which includes verifying your information.
Credit Report Fees
If a bank is charged a fee to pull your credit report, they will likely charge you a one-time fee in return. Many small business lenders charge a credit pul fee even if you are applying for bad credit small business loans. Fees range from $10 to $20.
Putting together a loan application and double-checking that it is complete can be a time-consuming process. Lenders sometimes charge packaging fees, particularly if you are working with a lender platform, for preparing the business loan application on your behalf.
If you plan on pledging collateral, the lender may require an appraisal. They will want a professional opinion on the value of your equipment, property, or vehicle. Alternately, if the loan is intended to purchase an item which will then serve as collateral (such as a loan to buy a building), an appraisal will also be required. Banks prefer to work with their own, trusted appraisers and will charge you an appraisal fee.
Underwriting fees are fees charged for evaluating your loan application and preparing the loan application. Underwriters verify that the information on your loan is accurate and true, as well as evaluate the loan’s potential profitability and risk on behalf of the lender. The fee can be a flat fee or a percentage of the loan’s total value.
Closing costs is a blanket term for all of the fees charged for processing your loan, from origination fees to processing fees. Rather than disclosing them separately, sometimes banks will just lump them together and call them “closing costs.” That is because banks will wait to charge the fees until the loan’s closing, often bundling them in with your total loan amount and including them in your monthly payments.
Lending platforms such as Lending Tree and SmartBiz refer your application to multiple lenders who then compete for your business. They might charge you a referral fee for this referral.
Service or Processing Fees
A bank’s costs do not end once they have disbursed the loan’s funds. They will have to send bills and provide customer service to you over the loan’s life. Banks pass along these costs to their customers in the form of service or processing fees. Service and processing fees can be charged monthly or be a one-time fee, and are usually a percentage of the payment amount.
The bank’s profit is calculated off the interest you will pay over the loan’s total term. If you prepay the loan, they will make less interest on the loan. Since this cuts into their profit, banks will often put a clause in the agreement which allows them to charge you a prepayment penalty. If you pay your loan off early, you will have to pay this fee.
SBA Guarantee Fee
Small Business Administration (“SBA”) loans charges lenders a fee for providing their guarantee, and lenders can pass this fee onto borrowers. The guarantee fee applies to loans over $150,000 with terms of one year or less, and is 0.25% of the portion the SBA guarantees. For loans longer than a year and for $150,000 to $700,000 the fee is 3% of the loan’s total amount. Loans longer than a year and over $700,000 cost 3.5%, with an additional 0.25% charged for any guaranteed amount more than $1 million.
A draw fee is charged on lines of credit. Similar to an origination fee on a loan, it is usually a percentage of the capital you have withdrawn. It will not be charged until the first time you draw on your line of credit.
Non-sufficient (“NSF”) Fees
Bounce a check or have an automatic payment withdrawal bounce? You will be charged a NSF fee. While it is difficult to predict these in advance, if one lender charges double than another lender for NSF fees you might want to take that into consideration when making your borrowing decision.
Late Payment Fees
If your payment arrives late, you will be charged a fee. Late payment fees typically range from $10 to $35, and can go up if you are habitually late in paying. Occasionally, they will be a percent of the payment amount or outstanding balance.
Wire Transfer and Payment by Check Fees
If you use a wire transfer to make a loan payment, you will be charged a “wire transfer” or “ACH transfer” fee. Payment by check is subject to a “check processing fee.” It costs banks more to process check payments and wire transfers than automatic withdrawals. If you pay by check or a wire transfer, you usually will be charged a fee between $10 to $20.
This is why it is often recommended that you set up automatic payments through your bank account.
Invoice Factoring Fees
Invoice factoring, or accounts receivable (A/R) loans, are loans given on a business’s receivables. If a business is having difficulty collecting on past due receivables, or just needs cash in a hurry, they can pledge their receivables as collateral for a loan.
Lenders advance a portion of the invoice, say $900 of a $1,000 invoice, and hold the rest in reserve. When your customer pays the invoice they will pay you the $100 less their percentage fee. That percentage can go up the longer the invoice is outstanding.
Some companies charge their fee on a weekly or monthly basis. Weekly is actually better for you because if a customer pays off an invoice the week a payment is due you are not stuck paying the lender for the rest of the month. Others charge a flat fee.
The amount the invoice stays unpaid, whether or not you pay a flat fee or percentage rate, and the payment structure can all have a big impact on the loan’s total cost to you. Make sure that you understand all the puzzle pieces involved in invoice factoring before entering into an agreement.
A Note on APR
The interest rate typically disclosed is a simple rate. The Annual Percentage Rate, or “APR,” is a more accurate reflection of the true cost of capital. That is because it includes the interest rate plus all related fees in its calculations. Often, there can be a large difference between the simple interest rate that you are quoted and the APR, which should tell you that there are significant hidden fees involved with your lender.
If you do not want to take the time to research every fee that a lender will charge you, ask them to provide you with the loan’s APR. It can be a quick and dirty way to compare the costs between two different lenders.
Fees are rarely negotiable, and can add up quickly. When comparing lenders, ask for a comprehensive list of fees that you will be charged and educate yourself about your loan’s total cost. It will help you pick the best product, and lender, for your business.