The Misunderstood Costs of Business Loans: 5 Fees You Might Pay

Business.com / Funding / Last Modified: May 17, 2017
Photo credit: Andrey_Popov/Shutterstock

Small business loans often come with a slew of additional fees. While they may vary based on the lender, the following are common ones you might encounter.

Financing is a crucial part of any successful business, providing much-needed capital for important investments like renovations, upgrades, expansions, and inventory. But it’s not without their downsides. Many business loans come with obscure or hidden fees, which you may not know about until it’s too late to turn back.

Let’s take a look at some of the lesser-known fees on small business loans. While they may vary based on the lender, the following are common ones you might encounter.

Origination fee

Origination fees are charged by lenders and brokers for processing your paperwork and getting the approval process on track. Generally, lenders will calculate this fee as a percentage of your total loan amount.

Unfortunately, such fees aren’t simply an extra cost to pay—they can also skew your APR, which can be particularly costly if you’ve taken out a short-term loan.

Underwriting fee

Simply put, underwriting is the process of assessing a client’s eligibility, creditworthiness, and overall risk level. A thorough, fair underwriting process will take a number of factors into consideration, including cash flow and revenue streams of a business, the value of collateral, credit scores, the borrower’s equity, and additional credit enhancements (like co-signing guarantees).

Underwriting fees account for all of this, and as mentioned before, vary based on lender. They’re typically charged as a percentage of the total loan amount.

SBA guarantee fees

The Small Business Administration (SBA) is an interesting case. As a government agency, it doesn’t directly loan out capital to entrepreneurs. Instead, it backs private capital with its own guarantee, which makes it less risky for private lenders to give entrepreneurs favorable loan terms. In other words, lenders won’t take as large a loss if borrowers default on repayment.

If you are taking out a loan from an SBA-approved lender, note that the SBA does charge a fee for this service, which is capped by law. Depending on your lender, this fee may (or may not) be passed on to you, the borrower. SBA guidelines state that loans under $150,000 will accrue no fees, whereas loans of $150,000 to $700,000 (with maturity of over one year) will accrue fees of 3%, with an additional 0.25 percent fee to be paid if a loan exceeds $1 million.

Bounce fees

As the name suggests, these unsuccessful payment fees are charged when your bank account has insufficient funds to pay back your loan (such as for a regularly scheduled payment). Generally, these fees are flat rates and not percentages.

Prepayment fee

The prepayment penalty clause usually stipulates that if the borrower pays back the remaining balance early, they’ll have to pay back a portion of the remaining interest, all the remaining interest, or a flat fee. So, you may think you’re saving money by paying back a loan early, but that’s not always true (when a prepayment penalty is present).

Why do these exist? Well, lenders make their money through interest. So if you pay your balance back six months early on a one-year loan term, your lender will lose out on six months’ worth of interest rates. This is a fee to look for before you sign onto a loan, even if you’re unsure whether or not you’ll pay back the loan early.

Remember: these five types of fees are very common, but they aren’t the only ones you’ll encounter. In fact, they’re just a small selection of the many fees that can come with commercial loans. Fees will vary based on loan type and lender, so it’s in your best interest to review your contract carefully.

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