When browsing loans for your small business, you’re most likely looking at the interest rate the bank or lender will give you, right?
Well, other than that, there are still other fees that you should be aware of.
Did you know lenders usually charge business loan fees on top of interest?
These loans typically include annual fees, application fees, and origination fees.
And if you’re new to the business world, you’ll get confused about some financial terms or jargon.
And if you’re unfamiliar with these terms, there’s a high chance you’ll recklessly agree to a contract that will charge you more than it should.
Below, you’ll learn various business loan fees that you should know to avoid unnecessary payments or scams.
I’ll also tell you about specific small business loan fees you can avoid.
What are Small Business Loan Fees?
You’ll need a loan if you need more funds for your small business. These loans have interest and will be based on your borrowed money.
However, some loans come with fees; some are necessary, but some might not be.
These additional payments need to be paid either upfront or over the course of your loan.
The type of fees and the exact amount will depend on the lender. That’s why it’s important to research first and compare offers from different banks and lenders.
Unfortunately, rates and fees will be much higher for people with poor credit because lenders will identify you as a risky loanee.
Your company’s background also has an impact on the lender’s decision.
Lenders also look at your company’s history. These loan providers are more inclined to approve business loans for older companies.
And if you’re just a startup, don’t worry; we have the perfect answer!
Borrowing Made Easy By Using Shelf Corporations
Shelf companies, also known as aged companies, are registered companies that do not engage in any business until someone purchases them.
Since banks are biased toward older companies, a shelf company will make it easier for you to ask these lenders for loans.
You can learn more about the advantages of shelf companies here.
Common Small Business Loan Fees
You don’t need to be a financial expert, but it is important to learn the common business loan fees to pay less and save more funds.
Lenders might have different names for the fees below, so it’s still important to ask them upfront. Here are small business loan fees that you might face:
Administrative Fee
Administrative fees are generic fees charged by financial institutions imposed on clients for managing, maintaining, and other administrative tasks related to receiving your loan application.
Appraisal Fee
An appraisal fee might be required if you plan on pledging collateral. Collateral can be property, vehicle, or equipment.
Banks and lenders prefer to hire their trusted appraiser to examine the value of that collateral to ensure it’s sufficient enough to guarantee the loan.
Suppose you’re getting a secured business loan secured by a piece of property; the lender might want to hire an appraiser to determine the collateral’s value to ensure it’s sufficient to secure the loan.
Closing Costs
Closing costs are usually found in real estate loans. This fee is seen when you sign the final loan paperwork, which also comes with other expenses like appraisal fees, attorney fees, credit check fees, and more.
Some banks will group different fees, from originating to processing fees, into this Closing Cost rather than disclosing them separately.
Credit Report Fee or Credit Check Fee
The credit report fee or credit check fee covers the expense of pulling your credit report from one of the credit bureaus.
Credit report fees typically range between $25 and $75.
Draw Fee
A draw fee is charged each time you take money from an account. It’s a common fee charged on business lines of credit.
A draw fee is usually a percentage of the capital you have withdrawn (typically 1% to 2%), and it will be deducted once you use your credit line for the first time.
Origination fees
Originating fees are usually charged to cover the cost of examining your application and funding your loan. These fees are sometimes called administrative fees by some lenders.
These fees are typically a percentage (about 2% to %5) of the amount loaned.
SBA Guarantee Fee
The Small Business Administration has the SBA loan program that provides insurance to lenders and reduces risks.
However, this insurance is not free, and lenders pass that cost on to the loanee, which usually ranges from 0.25% to 3.37% of the guaranteed portion of the loan.
Underwriting fee
Underwriting fees are like origination fees since they are charged for reviewing and preparing your loan application.
Underwriters will verify if the information on your application is accurate, and they will assess the loan’s possible profitability and risks.
Small Business Loan Fees That You Can Avoid
Some business loan fees are charged due to certain actions (or inactions). These are preventable, including:
Application Fee
As the name suggests, the application fee is needed upfront when you submit your application.
This fee covers the cost of the lenders reviewing your application and deciding on your loans.
How To Avoid This Fee
Some lenders charge an application fee upfront just to review your application.
Application fees are one of the fees that you should avoid. Do your research and compare different lenders and banks.
Choose a business loan that won’t charge an application fee since paying it will not guarantee your loan approval.
Prepayment Penalties
You’d be surprised to know that some lenders will charge you for paying early.
“Now that’s just nonsense! Why would I need to pay extra if I’m paying them back early?”
That’s because the bank’s profit is measured by the interest you’ll pay over the loan’s duration. If you prepay the loan, they will have less interest on the loan.
Since this means it’ll damage their profit, lenders or banks will often charge you a prepayment penalty.
How To Avoid This Fee
Similarly to the application fee, you can easily avoid this fee by choosing a bank or lender that doesn’t have these practices.
Compile a list of possible lenders in your area and assess them individually.
Late Payment Fee
You will be charged a late payment fee if you cannot pay on time. Usually, it ranges between $30 to $40 but can still go up if you’re consistently late in paying.
How To Avoid This Fee
These fees are easy to avoid; you just need to pay on time. And if you’re having a hard time paying your bills on time, here are a few tips that can help you:
Tips to Help Pay Bills on Time
- Set up an autopay whenever possible. Credit card users can set up bills to pay the statement balance, minimum balance, or a specific amount every month.
- Track your bills’ due dates through a calendar
- Plan a budget that works for you
- Ask your lender to adjust due dates
- Consider debt management plans
Non-sufficient (“NSF”) Fees
Your lender or bank can charge a non-sufficient funds (NSF) fee when the account used to cover a payment lacks funds.
For instance, let’s say you’ve set up an autopay on your credit card. If your monthly bill is $150, but you only have $65 in your account on the exact due date, then your bank will bill you with an NSF fee.
How To Avoid This Fee
Don’t worry. Similar to the ones above, this fee is relatively easy to avoid just by ensuring that your mode of payment is correct and that you actually have funds for it.
Important Reminder on How to Assess Your Loan Fees
Every bank or lender is unique. Some lenders do not publicly advertise fees on their websites, so researching these providers will be hard.
But here’s a quick tip: You can get an idea of which lender will most likely have lower charges just by looking at their annual percentage rates (APR).
The Federal Reserve requires lenders to disclose their APR before signing any contract.
The lender’s APR reflects a company’s processing fees and interest rates. Generally, the lower the APR, the lower your monthly bills.
Small Business Loan Fees: Final Thoughts
Aspiring business owners need all the funds they can have to maintain and grow their new small business ventures.
However, if you’re calculating how much you’ll need to pay monthly, you must also consider small business loan fees.
Knowing these small business loan fees is crucial to maximizing your funds for more significant matters rather than paying some unimportant fees.
You are not required to pay every fee that a lender tries to charge you.
Some fees, like the Application Fee and the prepayment penalties, can easily be avoided by researching and picking a loan provider that wants the best for you and your business.
Understand the common fees and negotiate with your lender to avoid or lessen these payments. Compare different business loans and find the lender that offers the lowest fees.