8 Hidden Business Loan Fees to Be Aware Of Before Applying
Before you move forward with a business loan, it’s important to familiarize yourself with hidden business loan fees. By doing so, you can avoid surprises expenses that may steer you into the cycle of debt. In the sections below, we’ll explain what you need to know about hidden fees for business loans.
What are Business Loan Fees?
In a perfect world, you would be able to borrow money without paying any fees. The reality is that lenders need to earn a profit somehow. That’s why many of them charge fees in addition to interest. Since these fees can affect your monthly payments and overall cost of your loan, it’s essential that you know what they are.
Typically, you can find the fees in the fine print once you receive your loan agreement. Some lenders may also disclose their fees upfront on their website so that you’re aware of them before you even apply. If you’re interested in a specific type of loan but are unclear on the loan costs, don’t hesitate to ask the lender.
Types of Hidden Business Loan Fees
There are a variety of hidden fees for business loans. Here are some of the most common fees you may come across.
1. Application Fees
If you’d like to take out a loan, you’ll be required to fill out an application online or in-person. Some lenders may try to charge you an application fee in order to compensate themselves for reviewing your loan application, analyzing your documents, and pulling your credit score. Depending on the business lender, application fees may be charged upfront or rolled into your monthly payments.
2. Origination Fees
Origination fees are a lot like application fees as they pay lenders for the administrative expenses of making you a loan offer. Oftentimes, you’ll be charged either an application fee or origination fee. You can expect origination fees to be flat fees or a percentage of your loan principal. However, they might also be lumped into the loan itself.
3. Late Payment Fees
Ideally, as a small business owner, you want to make all of your payments on time. However, life may happen and cause you to miss a payment every once in a while.
If your payment is passed due, lenders may charge you late fees. These fees are usually flat fees or a percentage of your loan’s outstanding balance. You can easily avoid late fees if you enroll in automatic payment deductions and keep enough money in your account.
4. Prepayment Fees
Paying off your loan early can save you a great deal of money on interest. But if your lender charges prepayment penalty fees, it may cost you. Unfortunately, some lenders do penalize borrowers for early repayment as it takes away from their profits. If your goal is to pay off a loan before its term comes to an end, make sure you won’t be on the hook for a prepayment fee.
5. Non-Sufficient Funds Fees
If you decide to enroll in automatic deductions to repay your loan, you have to pay a non-sufficient funds fee any time a lender deduct the money but there’s not enough of it in your account. Non-sufficient funds are almost always flat fees that can add up quickly if you don’t keep an eye on your checking or savings account.
6. Closing Costs
Contrary to popular belief, closing costs are not only for mortgages. You might notice them when you initially take out a business loan.
Closing costs are usually made up of all the fees you’ll need to pay, including origination fees, processing fees, and others. If a lender does charge closing costs, find out exactly what they are so you can ensure they’re legitimate.
7. Draw Fees
Draw fees are commonly seen with business lines of credit. They’re essentially origination fees and charged as a percentage. You’ll likely have to pay a draw fee the first time you borrow money from your business line of credit, once the funds have been distributed to your bank account.
8. Guarantee Fees
While SBA loans come with countless benefits that you may not find elsewhere, they do have guarantee fees. These are fees incurred by lenders for the SBA guaranteeing a large percentage of their loans. While each type of SBA loan has its own requirements, most SBA guarantee fees are due within 90 days of when the loan is approved. These fees depend on the loan amount and repayment term.
Conclusion: Watch Out for Hidden Fees for Business Loans
Hidden fees will play a significant role in how much you pay for your loan, which is why it’s a good idea to shop around and compare your options. Note that if you find a lender that advertises “no fees,” they may make up for this with higher interest rates. Or they might have rigorous requirements that are difficult to meet.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.