The 12 hidden fees that could be associated with your small business loan

“Read the fine print.” Whether reviewing a job offer or car lease agreement, it’s something we’re always reminded to do. Reading, and more importantly, understanding the fine print is especially essential when applying for a small business loan. It’s critical to understand everything you’re paying for; no one wants to be surprised with any “hidden” fees that could increase the cost of borrowing.

It literally pays to know any fee that could hit. While you know to assess the interest rate on a loan, there’s more to consider when doing your research and talking to business lenders about financing.

Here are all the fees you might see associated with your small business loan:

1. Origination fee

The origination fee on a loan is a common fee charged upfront.

Like a processing fee, an origination fee essentially covers the administrative costs of packaging a loan. The actual amount typically ranges between 1 and 6 percent of the loan principal, though it can be a flat fee, too. 

The origination fee isn’t always explicit — it’s often rolled up into the loan itself, which means you’re essentially borrowing the cost of the fee in the loan you take. That means you’ll pay it back through your regular payments (with interest on top, of course).

2. Underwriting fee

An underwriting fee covers the work of loan underwriters, who verify and review all the personal and business information you provide to lenders. It’s nice to know you’re not gathering all of those financial statements, credit reports, tax documents, etc. for no good reason — there is a person on the other end combing through this stuff.

This fee isn’t quite as common since some lenders make the underwriting fee part of the origination fee. Others add an underwriting fee as an additional fee or standalone charge, generally when charging no origination fee.

3. Closing costs

Often associated with real estate purchases, closing costs for small business loans cover other expenses involved with processing a loan. These could include a business valuation or commercial real estate appraisal, for instance.

For the sake of simplicity, some lenders bundle all their fees as one closing cost fee. If that’s the case for your small business loan, be sure to look at the full details of the loan to know precisely what the closing costs include. Be certain you’re paying for something that’s both fair and legitimate.

4. Late payment fee

This one shouldn’t come as a surprise — and is yet another reason why you should do everything in your power to get your loan payments in on schedule.

If your loan payment is late, your lender will most likely charge you a late payment fee. This usually takes the form of either a flat amount or a percentage of your outstanding balance. The good news is that most lenders offer a grace period during which they won’t assess a late fee, so check the terms in your loan contract.

5. Prepayment penalty

If you pay back your loan in full early, you could be charged a prepayment penalty. But why would you be punished for being a responsible borrower?

The reasons are in the financials. If you pay off your loan early, the lender loses out on making money off interest. Considering inflation and the labor involved in processing and servicing the loan, they might not even haven’t fully recouped all their money.

Although many banks and financial institutions have stopped charging a prepayment penalty, it’s important to check your lender’s terms to see if the loan product you’re considering includes a prepayment penalty, especially if you might be in a position to pay the loan off faster than required.

6. Service fee

Lenders perform a variety of activities during the lifetime of a loan, such as keeping records of payments, providing an amortization schedule, and offering customer service and support.

You might not always see a service fee on your loan. But if you if do, it’s generally taken as a percentage of the total loan principal or percentage of the monthly payment.

7. Guarantee fee

A guarantee fee is specific to an SBA loan. An SBA loan is a specific type of small business financing backed with an up to 85 percent guarantee from the U.S. Small Business Administration. As a result, the SBA administers a fee to the borrower that’s essentially an origination fee charged at closing.

The fee can vary with the type of loan and amount, and loans up to $125,000 accrue no fees. The SBA also provides fee terms for veterans on certain loan programs.

8. Insufficient funds fee

Your lender will assess a fee if you’ve set up automatic loan payments from a bank account and, take a guess, you have insufficient funds. Therefore, this is also called a bounce fee or unsuccessful payment fee.

In this situation, you’ll generally be hit with a flat fee instead of a percentage, ranging from about $10 to $40.

9. Payment processing fees

Chances are you’re going to be making Automated Clearing House (ACH) payments, which are electronic payments also known as direct debits (the opposite of direct deposit). But if you decide to pay with physical checks, if your lender accepts that, you might find a payment processing fee attached. Check with both your bank and lender to see if fees are charged for paying in this manner.

Similarly, if you make payments via wire transfer, your bank and/or the lender might have a wire transfer fee. This could be a flat fee of anywhere from $5 to $25 or a percentage of the transaction.

10. Loan packaging fee

Sometimes, a lender will charge a packaging fee for helping you arrange financial documents and other information for review by the loan underwriter. If you go through a third-party platform, it may offer loan packaging services, too, and therefore could charge an associated fee.

11. Referral fee

If you apply for a loan online through a lending platform, a referral fee might be added to the loan. A referral fee is a charge for helping connect you to a loan. The lender often pays this fee, but some platforms pass this onto the borrower. Make certain you check where this responsibility falls, so you’re aware.

The advantage of paying this is that a lending platform can help you quickly search for and find the loan that’s the best fit for your business with the best terms.

12. Factor fee (or factor rate)

A factor rate is most often used to calculate the cost of a merchant cash advance, though it can also be used on short-term loans and invoice financing. It’s expressed as a decimal number usually between 1.1 and 1.5. To figure out how much the merchant cash advance will cost you, multiply the factor rate by the total amount borrowed.

For example, if you get a merchant cash advance of $100,000 with a factor rate of 1.2, you’ll be expected to repay a total of $120,000.

Understanding the cost of your loan — including fees

Borrowers should always examine and compare interest rates — and never ignore a loan’s annual percentage rate (APR). That’s the only way to get the full cost you’ll incur for borrowing money. The interest rate tells you the cost of borrowing the principal amount but doesn’t include other fees. The APR includes all fees into its calculation, which means sometimes a higher interest rate with fewer fees can actually end up as a less expensive loan.

When shopping for loans, be sure to compare offers from multiple lenders and even consider different types of loans. That way, you’ll end up with the small business loan that works best for you.