Common Small Business Loan Borrowing Fees
Starting and owning a small business can get costly, which is why many company owners end up turning to small business loans to help them get started, fund an expansion or pay for an immediate need, such as an important repair. There are numerous options when it comes to finding the right financing for your company, whether you shop online or go to your local bank. Before you agree to any type of loan, you should know the typical fees charged and how much you should expect to pay for them to ensure that you are not being taken advantage of in your time of need.
The origination fee is something you see on almost any business loan. This is the money the lender charges to process your application, go through the file, and put the financing together. This is how the bank makes its money upfront regardless of whether or not you default on your payments later on down the road. You will see this cost as a percentage or point of the loan amount. For example, if your lender charges an origination fee of 2 percent or 2 points, and your loan amount is $100,000, you will pay $2,000 as a part of the closing costs of your loan. This amount is typically not able to be rolled into your loan amount – you must pay it in cash before the loan funds. Every bank charges different origination costs, and typically bases them on your interest rate – the higher your interest rate, the lower the origination charge typically falls.
Filing or Processing Fee
The lender may also charge you a filing or processing fee, which is basically a charge that covers the costs necessary to go over your loan. The money reaped from this cost helps to pay to pull your credit, whether personal or business, the time it takes to go over your business assets, the documents that need to be ordered in order to verify the statements you make on your application, and the phone calls necessary to validate certain information that cannot be done in writing. It also helps to cover any third party fees that are involved in your loan. The processing charge can be 1 percent or more of the loan amount depending on the amount of work involved in your loan. Your lender can tell you up front what they will charge in order for you to make a proper decision.
If you are buying a business with your small business loan, an appraisal will be necessary to determine the fair market value in order to determine the amount of financing you are eligible to receive. The appraisal cost covers the appraiser coming out to your business and inspecting it, writing the report, and delivering it to the lender. The cost ranges between $2,000 and $4,000 depending on the size of the business and the area of the country you are located. Typically, every bank works with their own appraiser, so you will be stuck paying the cost of that professional. In some rare cases, you can appoint your own, but most lenders require the professionals they already have on staff or approved for use by their company.
Not every business loan has a prepayment penalty, but it is important to read the fine print to see if you will have one. Depending on the terms provided, you may be charged a penalty if you pay the loan off in its entirety before the maturity date or if you make extra payments. The penalties can range from a small percentage of the outstanding balance to one lump sum that is predetermined at the time of your contract. If you do not want a prepayment penalty because you foresee yourself paying the principal off before its maturity date, you can negotiate to not have this fee, but you will likely have to pay a slightly higher interest rate in exchange so that the lender still makes its profit. Some lenders do not negotiate this cost – you either take it or leave it, so make sure you understand what your loan entails before taking it on.
If you take a business line of credit, where you do not get the full amount of the funds disbursed to you right away, but rather at pre-determined or as-needed increments, you may pay a fee every time you “draw” the funds. Every lender charges a different amount, so it is important to ask what the cost is so that you know ahead of time. These funds help to cover the costs of the paperwork and services necessary to transfer the funds to your account.
The fees involved in small business loans vary by lender and location. Even if you obtain your funds from a local bank you often do business with, make sure you understand the charges and terms so that you are not paying for something you did not anticipate. There are many lenders out there that offer small business loans, so make sure to shop around to not only get the best interest rate, but also to make sure that you have the lowest costs associated with the loan so that you can ensure that you are keeping your business as profitable as possible.
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Written by William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain’s Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.
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