9 Common Small Business Loan Fees Explained
When applying for a small business loan, it’s easy to get lost in the financial jargon. Without the appropriate knowledge, you can blindly agree to a contract that eats into your net loan proceeds.
While you might not be a finance expert, it’s important to learn the typical small business loan fees and how they affect how much you owe. This article looks into the typical commercial loan fees that lenders charge and how you can avoid some of them.
9 Typical Business Loan Fees To Watch Out For
When you take out a loan, certain fees are expected as payment for processing your application. The exact amounts vary by lender, so you must compare providers first. It’s also good practice to ask what the terminologies mean, as lenders might have different names for their fees. Here are some business loan fees you may encounter during the lending process:
SBA Guarantee Fee*
This fee takes effect if you’re applying for a Small Business Administration (SBA) 7(a) loan. The guarantee fee depends on the dollar amount guaranteed and the repayment terms, for example:
Less than $150,000 (loan term < one year): 0.25% of the guaranteed portion (85%)
More than $150,000 (loan term < one year): 0.25% of the guaranteed portion (75%)
*Currently waived due to COVID-19
Service or Processing Fee
Your lender may charge a service fee for maintaining your loan over its term, which might be used to cover overhead expenses, like billing. Service charges could be a one-time cost or paid monthly along with your dues.
This is the fee for evaluating your loan application and approving it. It can be either a fixed amount or a percentage of your approved loan (usually averages between 1% and 6%). Some creditors include the origination fee in your total loan amount, so you’re technically borrowing the fee and paying for it with interest.
For example, if you were approved for a $100,000 loan with a 4% origination fee, your fee would be $4,000. This amount is usually deducted from the money you receive initially, though your principal remains unchanged at $100,000.
If you are borrowing through a lending platform, the packaging fee will cover the preparation of your loan application requirements (e.g., financial statements, planned use of funds). This fee is standard with lending platforms.
Small Business Loan Fees You Can Avoid
Some business loan fees are charged due to certain actions (or inactions). These are preventable, including:
Some lenders charge a small fee upfront to review your application, whether or not you get approved. For your protection, avoid companies that charge you anything before an approval.
Administrative Fee (Monthly or Annual)
Some lenders might charge a monthly or annual upkeep fee. This is not a best practice. There are plenty of loan providers that do not charge these fees. It’s all right to avoid lenders that include these fees in their bills.
Late Payment Fee
When you pay your monthly dues late, you will incur a charge. It is common for charges to increase depending on how late the payment is. You can avoid this by always paying your loan on time.
Insufficient Funds or Unsuccessful Payment Fee
If the check you issued or auto-debit arrangement withdrew from an account with insufficient funds, you would be charged a fee. To avoid this, always make sure that your account is properly funded before your due date.
Early Payment Fee
You’ll be surprised to know that some lenders charge a fee if you decide to pay your loan off early. Some providers charge a fixed amount, while others will require you to pay the remainder of your interest for the full term. Try to dodge companies that have this practice.
Important Note About Evaluating Loan Fees
Not every lender publishes their fees on their website, so comparing providers based on these specific items can be challenging. However, you can get a sense of which lender would have lower charges by looking at their annual percentage rates (APR), which the Federal Reserve requires them to disclose before any contract is signed. APRs reflect the company’s processing fees plus the interest rate. The general rule is that the lower the APR, the lower your monthly payments will be.
Take Home More of Your Business Loan With LendThrive
Small business owners need all the funds they can get to build and grow their ventures. That said, it is essential that you partner with a loan provider that is also looking after your best interests.
LendThrive offers one of the most attractive funding solutions for growing companies, with fixed rate business loan plans designed to help you succeed.
To learn more about how we help small business owners thrive, get in touch with us.