More than 29% of new small businesses fail because they run out of capital. Getting a business loan is an excellent way to maintain operations and keep your business on the way to profitability.
But applying for and getting a loan is not free. All loans carry a specific interest rate, which will vary based on the strength of your business and the risk that the lender incurs. On top of the interest rate, there are also different types of loan fees that you have to pay.
Loan fees can be confusing and complex, so it's essential to understand what type of fees you will have to pay, the terminology, and how much the entire loan will cost your business. Reading the fine print and asking the right questions can save you a lot of hassle and help you make the right financing decision.
Read on to learn more about what loan fees you may face in the process and what that means for the total cost of your loan.
Understanding Commercial Loan Fees and Charges: Business Loan Closing Costs
Closing fees are the costs of taking out a loan can encompass many deferent types of fee's associated with the business funding, including but not limited to;
- Application Fee
- Origination Fee
- Processing Fee
- Funding Fee
- Credit Report Fee
- Site Inspection Fee
Together, these fees form part of the total loan financing options. One crucial component to closely evaluate is the "borrowing rate" that plays a pivotal role in your real estate closing costs and mortgage closing costs. Your borrowing rate can affect the calculation of interest on the principal loan amount, effectively influencing the total cost of the loan. An integral part of this process includes taking into account the closing costs, which often incorporates lawyer fees, recording fees, and appraisal fees. They also cover any other third-party expenses vital for due diligence conducted by the issuer, such as Bank of America, critical for validating your loan agreement.
Often, brokers in this field may talk about mandatory closing costs and broker fees. However, they might not elaborate on the potential borrower's costs, which encompass thorough checks on your business's equity and creditworthiness. Remember, it’s your responsibility to inquire about detailed explanations and calculations of these costs.
Understanding that your borrowing rate and the closing costs include all such fees, including placement and prepayment penalty fees, can provide you with robust negotiating power for your loan. For an accurate estimation of your loan cost, using a business loan calculator could be a beneficial tool. By judicious consideration of costs, compensation strategies, and efficient use of tools like a business loan calculator, you can significantly reduce the business loan fees payable to lenders.
Difference Between a Business Loan Interest Rate and the Annual Percentage Rate
When you apply for a small business loan, you will see both your interest rate listed and something called the annual percentage rate or APR. Both are expressed in percentages, so many borrowers view them interchangeably.
But the interest rate and the APR aren’t the same things. The APR reflects what you’ll pay in interest and fees. Understanding which costs represent your interest rate and APR allows you to distinguish better the amount you will pay in interest rate fees, business closing costs, and other fees. Let's dig deeper into the differences and how they affect your small business loan.
1. Exploring Interest Rates for Commercial Loans
The lender charges the interest rate to lend you the principal amount (the amount you borrow). This interest is a critical part of the small business advertiser disclosure that outlines the rate at which your balance will increase over time.
For instance, if you have a business loan with a principal of $100,000 and an interest rate of 8%, this interest is added to every dollar of your loan balance each period. This means that your opening balance begins at $100,000 and decreases as you make payments.
The rate of your small business loan interest rate hinges on numerous factors, all of which are profoundly affected by the advisors guiding your decision-making process. These factors encompass:
- Your lender and their rates. While small business loans procured from conventional banks and credit unions tend to have lower interest rates, others may inflate costs with seemingly unreasonable payment fee lenders charge. Even online business loans can have varied rates, with some potentially adding hundreds or even thousands of dollars to your loan.
- The type of loan you are getting. Certain loans, like the SBA 7(a) loan, might offer lower interest rates, whilst other formats such as invoice factoring loans or lines of credit may carry heftier rates.
- Your business's financial situation. A lender could impose higher interest rates if your business isn't generating expected profit or if you have a low credit score.
- Available collateral. Borrowing a large amount may require you to give an asset as collateral. The interest rate could change based on the value of this collateral. A high-value asset like real estate, or a significant borrower's deposit, could help you negotiate a lower interest rate.
2. Understanding Annual Percentage Rate (APR) in Commercial Loans
You won't pay all your fees immediately when you take out a loan. These fees, including underwriting process fees, lending costs, and even appraisal fees, will be spread out over the entire duration of your loan. Various banking institutions incorporate them into your interest rate, constructing what's known as your total acquisition cost for the loan
As with interest rate charges, business loan fees can also be charged as a percentage of your principal. The combination of these fees alongside the interest rate forms the Annual Percentage Rate or APR.
For a clearer perspective, look at our $100,000 business loan example.
Lets say your interest rate is 8% , another 2% in fees such as a business loan processing fee, or an underwriting fee, with a term of 1 year. As a result, your APR will calculate based on rate, term, payment frequency and loan fees making your APR 11.768% for monthly payments, 11.933% if your payment is every 2 weeks, 12.009% weekly payments or 12.075% daily payments .
Calculator.net has a simple APR Calculator which is very helpful to calculate your exact APR based on based on rate, term, payment frequency and loan fees.
Deciphering your APR can depend on an array of factors. A short-term loan, for instance, typically results in a higher APR. As the APR is distributed over your loan duration, shorter repayment periods equate to loftier APR percentages. The specific fees that your lender charges, such as appraisal fees in a CMBS package, also play a crucial role.
Understanding the divergence between interest rates and APR is fundamental for distinguishing the true cost of your business loan. This way, as a business owner dealing with business loan providers can navigate the often convoluted landscape of business loans without being unprepared for your overall payout.
An Overview of Loan Application Fees: Types of Business Loan Fees
While most financial institutions will lump closing fees together and present them as one number, it's good to understand each business loan fee and its role. This includes the referral fee, a one-time charge applied by online lending marketplaces for referring you to one of their lending partners. So, we dive into the world of business loan closing costs, examining varying types of loan fees, including referral fees, that are applicable for a small business loan.
1. Loan Application fee
When you look for business funding and apply for a loan, you might be charged a loan application fee. This one-time fee covers the cost of processing your application, getting the necessary documents, and analyzing your credit score.
2. Loan Origination fee
Origination fees are usually a percentage of your total loan amount. Your origination fee could be as low as 0.5% or as high as 5% in some cases higher, if its a "hard money" business funding product. These fees cover the cost of taking out the business loan, such as underwriting or funding costs.
3. Loan Processing/Packaging fee
Similar to origination fees, some institutions charge a packaging fee. These fees cover various lender costs; some lenders charge a packaging fee instead of an origination fee. For example, the Small Business Administration (SBA) does not charge origination fees but does charge packaging fees.
4. Loan Underwriting fee
Many lenders have to go through an underwriting analysis for your business to determine whether you should get the amount you asked for and what interest rate you should have. The underwriting fee is usually packaged in with origination fees.
5. Wire transfer fee
You can choose how to receive the funds if approved for financing. Lenders charge a wire transfer fee for that service when you choose a wire transfer.
6. Lines of credit annual fee
Many financial institutions will charge your business an annual fee, which could be a flat fee. This fee only serves to maintain your line of credit so it can stay open and active.
7. Late payment fee
You will have a set payment frequency when you take out your business loan, such as weekly or monthly payments. If you miss payments, you might have to pay late payment fees. This might be a flat fee or a percentage of the amount due for that period.
8. Non-sufficient funds (NSF) fees
If your loan payment is due and you don't have sufficient funds in your business account, you might be charged a non-sufficient funds (NSF) fee. You will still have to pay the regular loan and NSF fees.
9. Loan Prepayment penalties
Most financial institutions want you to abide by the timeline you agree on when you take out the loan. They might charge you a prepayment fee if you want to pay your loan earlier. The reason is that the lender might lose a lot of interest money, so the prepayment penalty is supposed to cover those losses.
10. SBA Loan guarantee fee
You can get SBA loans from various lenders, but the SBA guarantees your lender will get 75% to 85% of the loan back, even if your business defaults on the loan. But because of this guarantee, the SBA charges a guarantee fee of around 2% to 3.75% of the loan amount.
The Importance of Understanding Commercial Loan Fees: Why Are Business Loan Closing Costs Important?
You might merely consider the interest rate and overlook the rest. However, advertisers often overlook key aspects like hidden fees, making it crucial to request a comprehensive editorial of all costs associated with your loan. You must also dive deeper into the details of closing costs when comparing loans.
In an era of transparency, innovative loan marketplaces, are committed to upholding integrity by being forthright about all loan fees, thus providing you with a lucid comprehension of what you'll owe.
Only when you truly comprehend your interest rate, APR, and business closing fees, can you make a sound decision about the most beneficial financing option for your business. It's advisable to have such decision-making overseen by subject matter experts, like Advancepoint Capital, utilizing transparency and proficiency for accuracy and objectiveness.
Conclusion
The process of getting a business loan to grow your business and fund new opportunities can be full of confusing financing jargon. Understanding the intricacies of business loans, including hidden paperwork costs, takeaway fees, and disclaimers is essential in making informed finance decisions. If you're on the hunt for transparent business loans, explore the extensive options available to you, like Lendio, in our revolutionary loan marketplace. Alongside other trustworthy partners, our marketplace includes options from esteemed home equity providers.
Additionally, we simplify the process of applying for a loan, affordably and efficiently. With AdvancePoint Capital, you'll find a rich diversity of options tailored to your specific requirements - inclusive of any important disclaimers.
The best part is, securing a business loan in less than 24 hours, with full transparency on your loan's real cost and takeaway fees is possible. Connect with our experts on What Are Business Loan Closing Costs? for guidance through this process, including understanding any disclaimers and dealing with takeaway fees. Harness the power of home equity and start growing your business — get a quote now!
