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.
To be considered for a small business loan, you are required to fill out an application for the loan. In some situations, the lender may charge you a small upfront fee to review the application. These fees are often used to process the application by doing tasks, such as check your check or appraising the value of your business property. When possible, it may be in your best interest to avoid lenders that require an application fee of any amount before you even approved for the loan.
Origination fees are charged by lenders and brokers for processing your paperwork and getting the approval process on track. Generally, lenders 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.
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 cosigning guarantees). Underwriting fees account for all of this, and as mentioned before, vary based on the lender. They're typically charged as a percentage of the total loan amount.
SBA guarantee fees
The U.S. Small Business Administration (SBA) 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 charges 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 a maturity of over one year) will accrue fees of 3%, with an additional 0.25% fee to be paid if a loan exceeds $1 million.
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.
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. 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.
Late payment fees
Just like with other types of loans, the agreement for your small business loan will most likely include late payment fees. The way these fees are charged vary, such as being charged as a flat fee, or they may be a percentage of the missed payment. The best way to avoid late payment fees is to make timely monthly payments.
Check processing fee
If you opt to pay the lender with checks instead of using a credit or debit account, you may be charged a check processing fee. This is because the task of check processing often takes more time, which is why many lenders prefer you pay in a method other than checks. Make sure to review your agreement so you'll know ahead of time that you may have to pay a fee for making payments by check.
After a reasonable amount of time, which is usually specified in your agreement, you may be required to pay overdue and collection fees in addition to the late payment fee. Many lenders charge collection fees if they have to take outside actions to acquire payment for your loan.
Credit check fee
A credit check fee is similar to the application fee, in that some lenders may charge a fee to check your credit score through the credit bureaus, such as Transunion and/or Experian.