Understanding Small Business Loan Fees
Searching for the perfect loan for your small business can seem like a daunting and confusing task. From merchant cash advances to lines of credit, there are many types of business loans available; all work a little differently, and all charge different costs and fees during the application and borrowing process.
The most effective way to get the best deal on a business loan is to be educated. If you want to ensure that you’ve found the perfect business loan (and aren’t paying too much for it) it’s important to know what kind of fees a lender might charge. Here are a few common fees you should be looking for.
Want help finding a business loan? Apply now to Merchant Maverick’s Community of Lenders. We’ve partnered with banks, credit unions, and other financiers across the country to bring you fast and easy business financing.
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This is a fee 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 very carefully before applying to a lender that does.
This fee, sometimes also referred to as a closing fee, is charged by the lender to cover the cost of processing and dispersing a loan. The fee is normally expressed as a percentage (ex: 4%), though it can also be a flat fee (ex: $295). The money is normally deducted from your capital before loan dispersal.
For example, if you have a $10K loan with an origination fee of 4%, the lender will deduct $400 before wiring the other $9,600 along to you.
Closing costs, not to be confused with closing fees, encapsulate all the fees charged for processing a loan, including origination/closing fees, processing fees, referral fees, and/or packaging fees, among others.
A draw fee is similar to an origination fee, but is applicable instead for lines of credit. Like an origination fee, the draw fee is normally expressed as a percentage, which is deducted from the capital you’ve requested from your credit line before dispersal.
Bank Wire Fee
When borrowing a loan, lenders commonly wire the money to your bank account via ACH. Because the banks need to talk to each other and ensure the money is going to the right place and that no fraud is going on, this process normally takes between one and three days.
Some companies give you the option of wiring your funds via a bank wire transfer, which is faster than an ACH transfer. This option is more expensive, though, so you’ll have to pick up the cost.
Check Processing Fee
ACH transfers are commonly used to collect periodic repayments from the debtor’s bank account. Some lenders offer the option of paying by check, but you’ll have to pay a fee for the extra cost involved.
Servicing and Maintenance Costs
These are fees charged monthly, quarterly, or yearly to cover the costs associated with collecting payments, maintaining records, following up on delinquencies, and 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 onto 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 Fee
Miss a payment deadline? Count on paying a late fee. Aside from the fee itself, a late payment may have an affect on your personal or business credit score.
When you borrow capital, lenders and investors expect to make money off the deal. When you repay before your term is up, somebody loses money. Some institutions protect against this possibility by charging a fee if you repay your loan early. For example, if you repay your loan two years early, you might be charged 2% of your current outstanding balance.
It’s important to note that some lenders, primarily those that use a flat fee instead of interest, have a prepayment penalty baked into the structure. In that case, it’s important to check whether or not the lender offers a discount for repaying early.
To truly understand the cost of your business loan, there’s one more number you need to look for: the annual percentage rate (APR). This number is used to communicated the total cost of a loan over the course of a year, including the interest rate and all fees associated with the business loan. APR is the easiest way to compare loans to one another regardless of loan structures, term lengths, or additional fees. For more information on APRs, head over to the Beginner’s Guide to APR.
Finding the perfect business loan is not easy, but once you know what look for the process is a little less difficult. To evaluate multiple low-interest lenders at once, a free loan matchmaking service, often called a “loan aggregator,” can be very useful.
Merchant Maverick has partnered with Lendio (read our review) to offer one such service: the Merchant Maverick Community of Lenders. By filling out one application, you can be matched to multiple potential lenders. Check your eligibility below.
• Free loan aggregation service; requirements vary by area and lender.
Learn more about the Community of Lenders
Need some more help finding the right loan for your business? We’re always here to help.