With so many lenders and loan options available to small business owners today, how can you choose the best loan for your business? While many potential borrowers focus on interest rates, there’s an equally important consideration: loan fees. These vary from lender to lender and can have a significant impact on the amount of money you’ll owe upfront, throughout the loan, and at payoff time.
To help you better understand the lending landscape, Excelsior Growth Fund (EGF) put together this list of common loan fees and what you need to know about each of them.
Why do lenders charge fees?
While lenders make money on interest charged to loans, many often also charge fees to cover the costs of reviewing, processing and funding loans. There’s a variance in the types of fees that lenders charge and how much those fees cost. It’s also important to note that traditional bank lending operates differently than U.S. Small Business Administration (SBA)-backed loans (in which the SBA guarantees loans made by lenders). Therefore, when applying for loans, be sure to ask each potential lender for a disclosure of fees. That way, you’ll know what fees are incurred with each lender’s loan package.
Fees incurred before a loan closes:
Some lenders charge application or processing fees to cover the initial cost of processing loan applications. This fee is charged up front, meaning that it’s paid at the time of application, regardless of whether an application is approved. Some lenders charge a flat application fee while other lenders set the fee based on the amount of the loan or other considerations. Before you apply, always ask a potential lender if there’s an application fee and, if so, how much it is.
When lenders move forward with their in-depth analysis (known as underwriting) of a loan application they incur internal processing costs. To help cover those costs, most lenders require some type of fee from applicants to ensure commitment to the process and to offset some of the processing costs.
Typically, these fees are stated as percentages of loans and often they must be paid directly by the applicants. For example, a 3% origination fee on a $10,000 loan would cost $300 in commitment/origination fees.
It’s worth noting that while lenders are prohibited from charging origination fees on SBA-backed loans, they may require application or commitment fees to move forward with loan underwriting processes.
Fees due at closing:
SBA Guarantee fees are often charged when borrowers accept an SBA-backed loan. The amount varies based on the guarantee amount, so be sure to ask your lender to let you know how much your fee, if any, would be and when it would be due. Usually, these fees are deducted from loan proceeds at closing.
Attorney/legal fees may be incurred with most SBA loans. In addition, other more complex financings—in particular, those involving real estate as collateral—will incur attorney or legal fees that must be paid by the borrower at closing.
Miscellaneous closing costs include other fees that may be charged at closing, particularly if the loan is for commercial real estate or a business acquisition. These fees include appraisal fees, business-valuation fees, environmental report fees and title fees. These are typically not negotiable or avoidable, but a Disclosure of Fees should detail which of these may be applicable.
Servicing or processing fees may be charged monthly or quarterly, and these can add up. If a loan you’re considering includes these fees, see if you can find another option that doesn’t.
Late-payment fees and non-sufficient funds (NSF) fees occur when you’re late or don’t have enough money in your account to cover payments. These are avoidable and based solely on how well you handle your financial obligations.
Prepayment penalties are charged when loans are paid off or refinanced before term-end dates. These fees can significantly increase the true costs of loans. If a loan you’re considering includes a prepayment penalty, ask your potential lender for another option without it or use another lender.
Know the true cost of borrowing
Interest rates alone don’t tell the true cost of borrowing—you need to know the annual percentage rate, or APR, as well which fees are paid in advance, what will be deducted at closing, and what costs will be rolled into the loan.
Reputable lenders will openly share APRs and fee disclosures, while predatory lenders often don’t in order to hide the high cost of the loan over time. Be sure that your lender provides all the information you need to make an educated decision.
For more information and help finding the best loan options, contact an EGF Business Advisor today.