If you’re considering a small business loan, it’s important to familiarize yourself with the different types of small business loan fees. In addition to interest rates, fees can impact how much a small business loan ultimately costs.
Lenders charge fees on small business loans to cover a variety of costs, like loan application and origination, check processing, and underwriting, and you could also face fees for late payment or prepayment. Which types of fees apply will vary depending on which lender you use and the type of loan you get. But knowing what to look out for can help as you compare loans in an attempt to minimize how much your small business loan costs overall.
Why Choose a Small Business Loan?
No matter how fantastic an idea may be, in most cases, it can’t become an actual business without the working capital to get it off the ground. If you’re not yet ready to pitch investors and don’t have the personal funds to bootstrap your business, you may want to learn about how a small business loan can help you turn your business idea into a reality.
Of course, small business loans are for more than just startups. Whether you’re looking to hire more employees, purchase more equipment or inventory, or just scale your idea from your bedroom to a co-working space, small business loans can provide the capital to make it happen.
Some reasons a small business loan may be right for you include if:
• You want to build business credit, potentially allowing you to qualify for larger loans in the future.
• You want to scale your business.
• You want to make your business more efficient with new equipment.
• You want to purchase more inventory.
• You want to hire and train more employees.
Before taking out a small business loan though, it’s important to ensure you have the financial foundation to manage your loan debt.
Small Business Loan Rates and Fees
Here are some common fees associated with small business loans.
Application Fee
Lenders incur certain fees when processing your application (e.g., credit checks and property appraisals). This fee covers those costs, and it will apply regardless of whether your application is approved.
Origination Fee
Lenders charge origination fees to cover their administrative costs, such as phone calls, emails, and interviews necessary to finalize a small business loan. The amount of this fee varies from lender to lender.
Check Processing Fee
If you make your loan payments via check, you may be charged a fee to cover the time and labor it takes to process a check. You may want to keep this in mind when deciding how you’ll make your loan payments.
Guaranty Fee
If you’re taking out a loan through the Small Business Administration (SBA), you’ll likely have to pay a guaranty fee. While the SBA guarantees loans, it doesn’t make loans, and thus generally assesses this SBA loan fee for its involvement.
Late Payment Fee
Like many loans, small business loans typically charge a fee when you make a late payment. You’ll want to ensure you set up a plan to make your loan payments on time to avoid this fee.
Underwriting Fee
The process of underwriting can be tedious — your lender needs to comb through your business’ finances and review market research and historical trends. The underwriting fee covers the cost of performing this task. It could either be charged as a percentage of the loan amount or a flat fee.
Prepayment Fee
Some lenders charge you for paying your loan off too early. They may do this for a variety of reasons, but one might be because they lose money in interest charges when you pay your loan principal before it’s due. This is an important fee to be aware of when mapping out your payment plan.
Additional Funding Options
If these fees don’t sit well with you, there are other options to consider that may make funding your business more accessible to you.
Family and Friends
Many people start their business with family loans, which is essentially money borrowed from family and friends. Using these individuals as initial investors can help you stay out of commercial debt, meaning that you can wait to apply for a small business loan when you might need to borrow a larger sum.
However, going into business with loved ones could be a risk. It might sour the relationship if things go south.
Crowdfunding
A number of small businesses have successfully been funded through sites like Kickstarter, GoFundMe, and Indiegogo. A great idea with a strong marketing plan could generate enough excitement and financial support to get things going.
Keep in mind that crowdfunding sites generally require a percentage of the funding received. Additionally, there could be a risk of idea theft or plagiarism by putting your idea out there early.
Credit Card
You could turn to credit cards as a quick route to getting capital for your business without a lengthy application process. However, interest rates may be high. Further, carrying significant credit card debt could potentially impact your credit score, affecting your future chances of qualifying for loans.
Recommended: Comparing Personal Loans vs. Business Loans
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The Takeaway
Small business loans can charge a variety of fees, including application fees, origination fees, underwriting fees, guaranty fees, and others. Some are avoidable, such as bypassing check processing fees by opting for another payment method, or steering clear of late fees through consistent on-time payments. Which fees will apply will ultimately depend on the lender and loan type, but fees can play a role in how much a small business loan ultimately costs.
As you explore your options for funds, you might also look into a personal loan. While you cannot use a personal loan for business expenses, it could help you to consolidate high-interest credit card debt you might have incurred, for instance. SoFi personal loans offer low, fixed rates, and allow you to borrow up to $100,000.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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