Business Loan Fees to Watch: Origination, Closing and Prepayment Charges
A guide to the fees that raise the real cost of a business loan, including origination, closing, guarantee and prepayment charges, with a worked cost example.
Fees are the part of a business loan that borrowers most often overlook, and they can add thousands of dollars to the cost. The common ones are an origination fee, closing or documentation costs, a guarantee fee on government-backed loans, ongoing maintenance or draw fees on credit lines, and a prepayment penalty if you pay the loan off early. Before you sign, ask for a complete written fee schedule and add every item to the cost of the loan.
The fees you are likely to meet
| Fee | What it is | How it is usually charged |
|---|---|---|
| Origination fee | Lender's charge for processing and underwriting | A percentage of the loan, often deducted from proceeds |
| Application or processing fee | Charge for reviewing the file | Flat amount, sometimes refundable only if approved |
| Closing or documentation fee | Legal, filing and document preparation | Flat amount or small percentage |
| Appraisal, survey, title, environmental | Third-party costs for real estate or large collateral | Paid to outside providers, often by you |
| UCC filing fee | Cost of filing a lien on business assets | Small flat amount to the state |
| SBA guarantee fee | Fee paid on the guaranteed portion of an SBA loan | Tiered by loan size and term, set by the SBA |
| Packaging fee | Charge by a broker or lender for preparing an application | Flat or percentage |
| Annual or maintenance fee | Ongoing charge on a line of credit | Yearly or monthly |
| Draw fee | Charge each time you draw from a line | Flat or percentage of the draw |
| Late payment fee | Penalty for a missed due date | Flat or percentage of payment |
| Prepayment penalty | Cost of paying off early | Percentage of balance or minimum interest owed |
Which fees apply depends on the lender and product. Credit unions and community banks often charge fewer fees than online lenders, but this is a pattern and not a rule.
Origination fees: the biggest line item
Origination fees are normally quoted as a percentage. Here is an illustrative example (not a real offer). You borrow $250,000 over seven years.
- A 2% origination fee is $5,000.
- Closing and documentation costs of $1,500.
- A third-party appraisal of $2,500.
- Total upfront cost: $9,000.
If the lender deducts these from proceeds, you receive $241,000 but must repay on the full $250,000. The effective cost is higher than the stated rate suggests. The loan payment calculator on this site has an upfront fees field so you can see the effect on total cost. Our guide on APR vs. interest rate explains how those fees convert into an annualized percentage.
SBA loan fees
SBA-guaranteed loans typically carry an upfront guarantee fee that is a percentage of the guaranteed portion of the loan, with the percentage tiered by loan size and, in some programs, by maturity. The SBA has changed fee schedules and has sometimes waived fees for certain loans in some fiscal years, so check the current schedule on SBA.gov rather than relying on old figures. Lenders may pass the guarantee fee on to the borrower. SBA loans also place limits on what lenders can charge for packaging and other services, and borrowers should review the lender's closing statement carefully.
Prepayment penalties
A prepayment penalty compensates the lender for lost interest when you repay early. Common structures include:
- Declining percentage schedule. For example, a fee of a certain percent of the balance in year one, a smaller percent in year two and so on, often described as a "step-down" such as 3-2-1. The numbers here are an example of the structure, and actual terms vary.
- Minimum interest or "make-whole" clause. You owe a minimum amount of interest even if you pay off sooner. This is common in online loans, where the fee is a fixed amount that does not decline with repayment.
- Yield maintenance. Used in commercial real estate loans. The penalty equals the lender's lost yield compared with current market rates.
- No penalty. Some bank and credit union loans have none.
On SBA 7(a) loans with maturities of 15 years or longer, a declining prepayment fee generally applies during the first three years if you prepay a substantial portion. On SBA 504 loans the debenture portion usually has a longer declining prepayment fee. Confirm current rules with the lender and the SBA, since these terms are updated from time to time.
Fees that hide in the structure
- Factor-rate pricing. A factor rate is a fixed multiplier, such as 1.25 times the advance, so the "fee" is the cost of the money. Paying early often saves nothing. See factor rates vs. APR.
- Daily or weekly payment fees. Some lenders add a fee for failed automated withdrawals.
- Required deposit or compensating balance. The lender may require you to keep money in an account, which reduces the cash you can use.
- Required add-ons. Insurance, a bank account or credit monitoring may be required. Ask whether each is optional.
How to negotiate and reduce fees
- Ask for a fee quote at the start. Use the term sheet, not a verbal summary.
- Ask which fees are negotiable. Origination fees often are, especially if you have competing offers.
- Ask whether fees can be rolled into the loan and what that does to the balance and interest.
- Request a no-prepayment-penalty option or a shorter penalty window and compare the price difference.
- Check state disclosure rules. In states such as California and New York, certain commercial financing providers must disclose the total cost of financing in a standard format.
Mistakes to avoid
- Comparing rates while ignoring a 3% to 5% fee on a short loan.
- Not reading the section of the loan agreement titled "default," where default interest and fees are described.
- Assuming a late fee is the only consequence of a missed payment. Some agreements allow the lender to raise the rate or call the loan.
- Paying a fee to a broker without understanding who is being paid and how much.
FAQ
Is an origination fee negotiable?
Often yes, particularly with banks, credit unions or when you have competing offers. Online lenders may be more rigid but can still adjust pricing.
Can I roll fees into the loan?
Sometimes. Doing so raises the balance and the interest you pay on it, but it preserves cash at closing.
Does paying a loan off early always save money?
Not with a fixed fee, a minimum-interest clause or a factor rate. Check how interest is calculated before assuming early payoff will reduce cost.
Who regulates these fees?
There is no single federal cap on most business loan fees. SBA rules limit fees on SBA loans, and states have their own rules for commercial financing disclosure and usury.
Sources
- U.S. Small Business Administration — current SBA fees and prepayment rules
- Consumer Financial Protection Bureau — lending and fee information
- Federal Trade Commission — small business financing guidance
- Federal Reserve — consumer and commercial lending publications
