Finding the ideal loan for your small business is no easy feat. Not only do you have to choose between lines of credit, cash advances, or a traditional loan, you also have to consider loan requirements. The most effective way to find the best loan for your business’ funding needs is to research and educate yourself on all of the options.
While interest rates, APRs, and other rates are important to understand, you’ll also want to have an understanding of the loan fees that a lender may charge. Here are some of the most common fees that apply to a variety of business loans.
1. Origination Fee
This fee is charged for processing the business loan application. When a business loan is processed, lenders must verify all of the information provided. The origination fee that you’re charged depends on the lender and the type of loan you applied for. Some lenders charge a flat fee origination fee while others set the fee based on a percentage of the loan. These percentages typically range between 1% and 6% of the loan amount.
When working with your lender, you’ll also want to determine if the origination fee must be paid upfront or if the fee is included in the total amount of the loan. If the origination fee is wrapped into the loan, you will pay interest on that amount. It’s best to pay this fee upfront if possible.
2. Processing Fees
Lenders not only process your loan up front, they also perform a variety of other administrative activities including billing and customer service. To cover these expenses, lenders charge a processing fee, which is usually billed monthly and based on a percentage of the loan.
However, processing fees can be charged differently depending on the lender and the loan, so be sure you fully understand your loan repayment schedule to know when these fees are charged. In fact, some lenders only charge a one-time processing fee versus extending it throughout the life of the loan.
3. Prepayment Penalty
As a borrower, it makes sense to pay off your loan early so that you save money on interest. But, for lenders, this could result in money lost. When you repay before your loan term ends, lenders lose money because less interest is paid on the loan. To protect against monetary loss from prepayment, some lenders charge a prepayment penalty. The penalty amount is usually a set percentage of the outstanding balance. Other lenders use a flat fee for prepayment.
4. Packaging Fee
If you apply for funding directly with a lender, you don’t have to worry about paying a packaging fee. But, if you borrow through a lending platform, expect to pay for the packaging and preparation of the loan. Lending platforms prepare your loan application by reviewing financial statements and ensuring the application is completed before it’s sent off to lenders for review.
5. SBA Guarantee Fee
For startups and small businesses, SBA loans are the most ideal option. But, there is a fee to be aware of when accepting this type of loan. If you apply for business funding through the Small Business Administration (SBA), you will be charged an SBA guarantee fee. For the 7(a) loan, the SBA guarantees up to 85% of the loan. This fee is based on the loan repayment terms.
For loans under $150,000, borrowers aren’t charged a guarantee fee. Loans over $150,000 with a one year or less term have a set fee of 0.25% of the guaranteed loan amount. Longer-term loans have guarantee fees that start at 3%. For any loan with a guaranteed amount above $1 million, an extra 0.25% of charge.
Why Fees Are Important
The lender, terms of the loan and your qualifications for the loan all have an impact on the fees that are associated with the loan. This can make loan comparison a little harder since you have to know the fine details of each loan before you can have a full understanding of the rates and fees that you’ll have to pay.
If you’re in the market for a business loan but don’t know where to start, one of the best ways to compare is to look at the APR rate that the lender charges. The APR is the overall annual cost of the loan, to include fees charged and the set interest rate. When comparing APRs, take note that the number provided is made with certain assumptions in mind. First, APRs are based off of on-time payments. APRs also assume that payments are made in full.
Loan Fees – Conclusion
Understanding the fees associated with certain business loans can further drive your decision in determining which loan is best for you. When comparing loans, be sure to pay close attention to the five fees above. Being prepared and understanding what fees are associated with a business loan makes you a wiser borrower.
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