Guide To Business Loan Rates & Fees

Small business loan rates and fees affect your cost of borrowing, so it’s important to make sure you do your research to find the most affordable loan for your business. The most effective way to get the best deal on a business loan is to educate yourself, starting with this guide.

Below, we’ll explain everything you need to know about business loan rates and fees. With a better understanding of business loan rates and fees, you’ll be able to start your search for the best small business loan for any situation.

Interest Rates For Small Business Loans

Interest is a percentage of the principal (the amount borrowers) that is added to the amount of money you owe the lender. Interest is how most lenders make their money.

There are two types of interest rates: fixed and variable.

• Fixed rates: The interest rate given to you at the beginning of your loan will be the same as the one you have at the end of your loan, assuming you keep up with your payments.
• Variable rates: Variable rates can change over time depending on current prime rates or other changes within the market.

It’s impossible to predict which type of interest rate will cost you less over time since a variable rate can fall just as easily as it can rise. The advantage of a fixed-rate loan is predictability; you’ll be able to plan for the payments more effectively.

Factor Rates For Small Business Loans

Not all loans have interest rates. Short-term loans, in particular, don’t last long enough to generate enough interest for lenders to make money. For these loans, lenders may opt to use factor rates.

Factor rates represent a percentage of your principal. It is added to the principal balance to determine the total amount you owe. Unlike interest rates, a factor rate is only applied once.

Factor rates are sometimes expressed as decimals (i.e., 1.3). For example, if you borrow $10,000 at a factor rate of 1.3 (30% of the borrowing amount), you’ll owe $13,000 in total.

Drawbacks Of Factor Rates

While factor rates are appealing due to their simplicity, there are a few drawbacks worth noting:

• Loans with factor rates are difficult to compare to loans with interest rates (i.e., a loan with a 10 interest rate is not the same as a loan with a 10% factor rate).
• Factor rates don’t account for early repayment. A loan with six-month terms will cost the same whether it is paid off in six months or three months. Fortunately, some lenders offer early repayment incentives.
• Taking out a second loan before paying off the first may lead to a situation known as double-dipping. In this scenario, you could end up paying interest upon interest. If you plan to take out a second loan before paying off the first loan, make sure your lender waives existing fees upon renewal.

Small Business Loan Fees

There are many types of loan fees you could be charged, and not every lender charges the same fees. Ideally, you’ll want to work with a lender who adds as few miscellaneous fees as possible.

While lenders don’t typically disclose fee structures before a loan application is submitted, here are some of the more common business loan fees you may be charged:

Application Fees

This fee is charged to cover the costs of assessing your loan application, whether you’re approved for a loan or not. Most lenders do not charge an application fee (or any fees) before you accept the loan, so consider your options before applying to a lender that does.

Origination Fees

The origination fee (also called a closing fee) is charged by the lender to cover the cost of processing and disbursing a loan. The fee is usually expressed as a percentage, though it can also be a fixed fee. Origination fees are typically between 1%-9% of the borrowing amount.

Unlike most fees, origination fees are usually deducted from your capital before loan disbursal. For example, if you have a $10K loan with an origination fee of 4%, the lender will deduct $400 before wiring the remaining $9,600 to your bank account.

Draw Fees

A draw fee is similar to an origination fee but is charged for lines of credit. Like an origination fee, the draw fee is generally expressed as a percentage, which is deducted from the capital you’ve requested from your line of credit before disbursal.

SBA Loan Fees

The Small Business Administration’s lending programs can provide significant value to borrowers, but they do come with some additional costs. For example, you may be required to pay a bank origination fee and an SBA origination fee.

Additionally, the SBA charges a guarantee fee on all SBA loans above $150K. This fee is initially paid by the lending bank, which has the option of passing the costs along to you.

Wire Transfer Fees

Lenders typically wire your loan disbursement to your bank account via Automated Clearing House (ACH). This process usually takes between one and three days to ensure the money is going to the correct account and to prevent fraud.

Some lenders give you the option of wiring your funds via a bank wire transfer, which is faster than an ACH transfer. Wire transfers are more expensive than ACH transfers, so you’ll typically be required to pick up the cost.

Check Processing Fees

ACH transfers are commonly used to collect periodic repayments from the borrower’s bank account. Some lenders offer the option of paying by check, but you may have to pay a fee for the extra cost involved.

Servicing & Maintenance Costs

These are fees charged monthly, quarterly, or yearly to cover the costs associated with collecting payments, maintaining records, following up on delinquencies, plus any other costs associated with maintaining a term loan or line of credit.

Servicing fees are commonly lumped in with your periodic payments. For example, your loan provider might deduct a certain percentage of each payment before sending the rest to the investor who owns your loan. However, you need to pay attention to a servicing or maintenance fee if it’s separate from your periodic repayments.

Late Payment Fees

Miss a payment deadline? Count on paying a late fee. Aside from the fee itself, a late payment may affect your personal or business credit score.

Prepayment Penalties

A prepayment penalty is a clause or condition that penalizes you for paying off your loan early. This penalty can take the form of a fee that’s levied against you if you pay your loan off before a minimum amount of time has passed. It can also, in the case of a fixed-rate loan, mean not pro-rating your loan.

Prepayment penalties exist because some lenders count on a minimum amount of return on their loan, and early repayment may mean the minimum interest they were expecting won’t have time to accumulate.

Using APR To Compare Small Business Loans

Comparing loan products, especially between lenders, is tough. However, there is a measurement that tries to roll these factors into a single, convenient number: the annual percentage rate (APR). The lower the APR, the less expensive the loan is. Learn more about this rate in our Beginner’s Guide to APR.

If a lender doesn’t provide an APR for you, you can still figure it out. The formula itself is pretty complicated, but there are numerous calculators you can use online to help calculate APR.

APR assumes regular, predictable behavior from both you and your loan. As useful as APR can be for making loan comparisons, there are some situations in which APR may lead you astray:

• Variable Rate Loans: Since you won’t have a fixed rate to plug into the APR formula or calculator, you’ll only be able to land at a ballpark figure for the total cost of the loan.
• Fees: APR won’t account for early repayment, late payments, or default, as well as more uncommon fees a lender may charge.
• Fixed Fee Loans: For loans with fixed fees, look at other metrics in addition to the APR, including the total cost of borrowing and the cents-on-the-dollar cost.

The Bottom Line On Small Business Loan Rates & Fees

Finding the perfect business loan is not easy, but once you know what to look for, the process is a little less stressful. Remember, the goal is to pay as little for the money you’re borrowing as possible. APRs, in particular, can be a useful tool for comparing loans, just make sure you don’t solely rely on them.