What fees to watch out for before you borrow and how much they could cost you
When it comes to the cost of a business loan, the interest rate is only one piece of the puzzle. Factors like your rate, loan term, type of loan, and how much you borrow have the biggest impact — but additional fees can add up fast. Even some of the best business loans come with extra costs that could total thousands of dollars over the life of your loan.
But not all fees are set in stone. We’ll break down the most common business loan fees and whether you can reduce or avoid them altogether.
1. Origination fees
Origination fees, also known as administrative fees, cover the cost of processing and funding your loan. Origination fees typically range up to 5% of your loan amount, sometimes higher.
Lenders may deduct the fee upfront from your loan proceeds, or it may be added to your loan balance. For example, if you borrow $100,000 with a 3% origination fee ($3,000) and the lender deducts it up front, you’ll receive $97,000. If it’s added to your balance, you’ll borrow the full $100,000 but repay the additional $3,000 over time with interest.
While origination fees are pretty common, a handful of lenders don’t charge an origination fee at all, like Kiva or Bluevine. However, always check whether they compensate with higher interest rates. Your creditworthiness may also help you get a lower fee.
2. Prepayment penalties
Prepayment penalties are fees for paying off your loan early since lenders lose out on expected interest payments. They can be a flat fee or a percentage of your balance.
Let’s say you owe $50,000 and have a 3% penalty. You’d pay an additional $1,500 to pay off your loan early. Before making an early payoff, compare the penalty to your potential interest savings to see if it’s worth it.
Some types of loans, like SBA loans or lines of credit, may not have a prepayment penalty at all. You may also find some lenders that simply choose not to include a fee for early repayment, which is where its competitors might.
3. Late fees
Late fees may be charged for missing a loan payment or paying past the due date. Lenders use them to encourage timely payment and cover administrative costs. They’re typically a flat fee of up to $40 but can sometimes be a percentage of your missed payment.
If you have a lender that charges late fees, it may offer grace periods before charging the fee, but others may be more strict. However, there are a fair amount of lenders that don’t charge a late fee at all.
To avoid any extra costs, set up automatic payments or reminders. If you do miss a payment, contact your lender. They may be willing to reduce or waive the fee in some cases.
4. Application fees
These fees are typically upfront charges that some lenders charge when you apply for a business loan. They cover the costs of processing your application, running a credit check, and reviewing your documents. They can cost anywhere from $100 to $500 or more.
However, not all lenders charge this fee. Many online lenders and alternative lenders like no-doc lenders skip them entirely. To avoid this fee, compare lenders before applying and ask upfront about any fees. And, if you are stuck with a lender that charges this fee, ask if it’s refundable if you aren’t approved.
Many miscellaneous fees and additional charges can pop up during your application process or throughout the life of your loan. These can include underwriting fees, annual maintenance fees, wire transfer fees, administrative fees, and more.
Lenders aren’t always upfront about these fees, and they certainly don’t highlight the extra charges. These additional costs can really add up and increase your loan’s overall cost.
The best way to avoid hidden fees is to ask your lender for a full list of all potential fees and carefully review the loan agreement before signing.
Wrap up
While interest rates often steal the spotlight, additional fees can also affect the cost of your business loan. From origination fees and late fees to application fees and hidden costs, these extra expenses add up quickly if you aren’t careful.
But many of these fees aren’t set in stone. With a little research, you can minimize or even avoid some of these costs entirely.
Once you’re ready to apply for a business loan, make sure to ask questions, compare multiple lenders, and always read the fine print to get the best deal for your business. You may also try comparing lenders on a marketplace, which allows you to compare multiple lenders and their fees with one application.
