When considering business funding, all of the financial jargon can quickly become confusing. If you’re not a banking expert, it can be difficult to understand all of the fees incorporated into a loan offer, and more importantly, what they mean when it comes to just how much you actually owe.
What Are Small Business Loan Fees?
In addition to the more straightforward components of financing like principal and interest, you’ll likely encounter other fees tacked onto the cost of your small business loan. Small business loan fees affect your closing costs and your monthly payment, and they can significantly inflate the price tag on your loan. So let’s look at some of the most common fees you might see when dealing with a small business lender.
To be considered for small business funding, you’ll need to fill out a loan application. Some lenders might try to charge you a small fee upfront to review your application–an application fee. As a rule, it’s a good idea to avoid lenders that expect you to pay any amount before you are even approved for a loan.
An origination fee is an upfront fee charged by a lender for evaluating and originating a loan; this fee is usually expressed as a percentage of the loan principal, but in some cases, it may be charged as a flat fee (like $750). The fee is used to pay for processing the loan itself.
Depending on the lender, an origination fee tends to run between 1 to 6% for small business loans.
As an example, if you were approved for a $50,000 loan with a 5% origination fee, your fee would be $2,500. This amount is typically deducted from the funds you initially receive. In this case, $47,500 would be deposited into your bank account–not $50,000. However, you’d still be expected to pay back $50,000 plus interest.
SBA 7(a) Loan Guaranty Fees
The Small Business Administration (SBA) guarantees up to 85% of the loan amount for 7(a) loans.
SBA guaranty fees are typically due within 90 days of the approval date of the loan. Typically, these fees range from 2-3.75% for 7(a) loans of $150,000 and above, depending on the loan amount and the repayment term.
Lenders are not permitted to charge additional origination fees on SBA 7(a) loans but are allowed to add reasonable “packaging fees” to the final cost.
You should be aware that other SBA loans come with varying fees. For example, the CDC/504 loan program has an annual service fee (currently 0.368%) and CDC servicing fee (currently 0.625%).
Monthly Administrative Fees
Some lenders may try to charge an administrative fee, which is an additional monthly upkeep charge. Monthly administrative fees can range anywhere from $50 to hundreds of dollars each month. These fees are not a best practice, and you should not expect to pay them to any reputable servicer.
An annual fee, like a monthly administrative fee, is an added loan maintenance charge but on a yearly basis. Plenty of loan servicers can lend you money without any administrative fees, and you should avoid lenders that include this expense in their terms.
Late Payment Fees
Standard with most loans, you’ll likely see late payment fees in your small business loan agreement. A late payment fee may be charged as a flat fee or as a percentage of your missed payment. Make your monthly payments on time as agreed to avoid this fee.
You may be surprised to learn that paying off your loan early could cost you. If you pay off some or all of your loan ahead of schedule, prepayment penalties can kick in. Some lenders charge a flat fee while some may make you pay back the interest for the full term. Unless you have no plans to pay off your loan early (which could save you money in interest payments), you should dodge lenders that expect you to adhere to these penalties.
Other Fees You May Encounter
In addition to the fees described above, there are plenty more associated with different forms of small business financing. For example, here are some fees that you may encounter with invoice factoring:
- Invoice Factoring Setup Fee: When invoice factoring is done in a pinch, the company handling your customer invoice may charge an initial setup fee in addition to the outstanding fees to be collected. This fee is typically a one-time charge of 3%, up to $1,000.
- Lockbox Fee: When payments are made by depositing checks into a lockbox provided by your servicer, you may be charged anywhere from $50 to $500 to use it.
- Wire Fee: Your servicer may charge $15-50 per loan payment made via wire transfer.
- Credit Check Fee: A fee to check your credit is similar to an application fee. Some lenders may charge you to peek at Experian or Transunion to find your credit score.
- Unused Line Fee: If a lender extends a line of credit and you do not use at least a specified percentage of that credit each month, you may be expected to pay a fee (typically between 0.15% and 0.5%).
- Collection and Overdue Fees: Beyond a reasonable amount of time, as specified in your loan terms, you may see Collection and Overdue Fees in addition to Late Payment Fees. Some lenders charge these fees when they have to take action to acquire payment from you.
Why You Need to Pay Attention to Fees
It’s possible to get funding without paying a myriad of unnecessary small business loan fees. If you’re not careful, you could end up paying thousands more than you need to. Additional fees, which are often hidden in the fine print, can harm your pocketbook and your business.
Let’s consider a $49 monthly administrative fee. You may think you’re paying for the lender’s time to monitor and manage your loan. But the reality is that most of the company’s processes are automated, and there isn’t an actual person looking at your account unless you call for customer service.
Through the duration of a 7-year loan, at $49 per month, you would end up paying $4,116 in administrative fees for a service that cost your lender less than $100.
So read your terms carefully and understand what it is you’re getting into before you sign on the dotted line.