Guide To Business Loan Rates & Fees

Small business loan rates and fees determine how much you’ll actually pay to borrow. Understanding how they work is the key to finding the most affordable loan for your business.

In this guide, we break down common business loan rates and fees so you can confidently compare lenders and choose the best small business loan for your needs.

Interest Rates For Small Business Loans

Interest is a percentage of the principal (the amount you borrow) that’s added to your total repayment amount. It’s how lenders make money on business loans.

Small business loans typically come with one of two interest rate types: fixed or variable.

• Fixed interest rates stay the same for the life of the loan, assuming you make your payments on time. This makes your monthly payments predictable and easier to budget for.
• Variable interest rates can change over time, usually based on the prime rate or broader market conditions. Your payments may increase or decrease as rates fluctuate.

Because variable rates can move in either direction, it’s impossible to predict which option will cost less overall. Fixed-rate loans offer stability, while variable-rate loans carry more uncertainty.

Factor Rates For Small Business Loans

Not all business loans use interest rates. Many short-term loans instead use factor rates, which allow lenders to earn a return without charging ongoing interest.

A factor rate is a flat multiplier applied once to your loan amount to determine your total repayment. Unlike interest, it does not accrue over time.

Factor rates are usually expressed as decimals, such as 1.3. For example, borrowing $10,000 at a 1.3 factor rate means you’ll repay $13,000 total.

Drawbacks Of Factor Rates

While factor rates are simple, they come with important downsides:

• Harder to compare: A factor rate can’t be directly compared to an interest rate, and a “10” factor rate does not equal 10% interest.
• No early repayment savings: You typically owe the full amount whether you repay early or on schedule, though some lenders offer early payoff discounts.
• Risk of double-dipping: Taking out a new loan before paying off the old one can result in paying fees or interest twice. If you plan to renew, confirm that existing fees will be waived.

Small Business Loan Fees

Small business lenders can charge a variety of fees, and no two lenders structure them the same way. In general, the fewer fees a lender charges, the less expensive your loan will be.

While many lenders don’t disclose their full fee structure until after you apply, these are some of the most common small business loan fees to watch for.

Application Fees

An application fee covers the cost of reviewing your loan request, whether you’re approved or not. Most lenders don’t charge application fees upfront, so think carefully before applying with one that does.

Origination Fees

An origination fee (sometimes called a closing fee) covers the cost of processing and funding your loan. It’s usually expressed as a percentage of the loan amount — typically 1% to 9% — but may also be a flat fee.

Origination fees are often deducted from your loan proceeds. For example, a $10,000 loan with a 4% origination fee would result in $9,600 deposited into your account.

Draw Fees

Draw fees apply to lines of credit rather than term loans. Like origination fees, they’re usually charged as a percentage and deducted from the amount you draw before the funds are disbursed.

SBA Loan Fees

SBA loans often come with additional fees, including lender origination fees and SBA guarantee fees. For loans over $150,000, the SBA charges a guarantee fee that the lender may pass on to you.

Wire Transfer Fees

Loan funds are typically deposited via ACH transfer, which is slower but usually free. Some lenders offer faster wire transfers for a fee, which is typically paid by the borrower.

Check Processing Fees

Most lenders collect payments via ACH. If you choose to pay by check, you may be charged a processing fee to cover the added handling costs.

Servicing & Maintenance Costs

These ongoing fees cover loan administration, payment processing, and account maintenance. They may be charged monthly, quarterly, or annually, and are sometimes built into your regular payments.

If they’re billed separately, make sure you understand how much they add to your total loan cost.

Late Payment Fees

Missing a payment can trigger a late fee and may negatively affect your business or personal credit score.

Prepayment Penalties

Some lenders charge prepayment penalties if you pay off your loan early. This may take the form of a flat fee or a requirement to pay a minimum amount of interest, even if the loan is repaid ahead of schedule.

Using APR To Compare Small Business Loans

Comparing loan offers across lenders can be difficult. Annual percentage rate (APR) helps by combining interest and certain fees into a single number. In general, the lower the APR, the less expensive the loan.

If a lender doesn’t provide an APR, you can estimate it using an online calculator.

APR assumes predictable loan behavior and doesn’t capture every scenario:

• Variable-rate loans: APR is only an estimate and may change over time.
• Fees: APR doesn’t reflect late payments, early payoff, default, or uncommon fees.
• Fixed-fee loans: Also compare total borrowing cost and cents-on-the-dollar, not just APR.

The Bottom Line On Small Business Loan Rates & Fees

Finding the right business loan isn’t always easy, but understanding rates and fees makes the process far less stressful. Focus on minimizing your total borrowing cost, and use APR as a comparison tool — not the only deciding factor.