Business Loan Origination Fee: Definition and Cost
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A business loan origination fee is typically an upfront fee charged by the lender to cover the cost of processing your loan application. It is a key factor in determining your total borrowing cost for a small-business loan.
Knowing the business loan origination fee — along with the loan interest rate — is helpful when comparing different types of financing and can help you choose a loan that’s the best fit for your small business.
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What is an origination fee?
A business loan origination fee is a one-time fee charged by a lender for handling paperwork and verifying the information on your application. Essentially, it’s the cost of the lender’s time used to check your credit score, review your business and personal tax returns, and verify your business income. Business loans of any type — term loans, lines of credit, commercial real estate loans and equipment financing — can all have origination fees.
Origination fees are often set as a percentage of the loan amount, although they can also be applied as a flat fee.
Also, not every lender charges an origination fee, and certain loans, like SBA loans, don’t allow origination fees. Although, SBA loans do require the borrower to pay an upfront fee called an SBA Guaranty Fee.
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How origination fees work
Some lenders charge a flat origination fee, like the $150 origination fee charged by Bank of America on its unsecured business loans. However, more commonly, lenders charge an origination fee as a percentage of your total loan amount, like the 0.5% origination fee that is applied to a Wells Fargo Prime Line of Credit.
For example, if you take out a $100,000 loan with a 1% origination fee, the fee is $1,000. The lender can subtract this fee from the total loan funds you receive. In the example, you would receive $99,000 dollars, but be responsible for repaying the full loan amount of $100,000.
The origination fee applied to your loan could vary based on the loan amount and your previous borrowing history. OnDeck, for example, charges borrowers an origination fee of up to 4% for their first loan, but the fee may be reduced for subsequent loans.
When reviewing loan offers, you’ll want to review fees, including any originations fees, with your lender. And before you sign any business loan agreement, check the fees section for full disclosure of the fees that apply to your loan.
How much are origination fees?
While the origination fee you pay can be influenced by loan amount, term and type, your choice of lender will often have the largest impact.
Here are approximate origination fees on business loans:
Conventional bank loans: 0.5% to 1%.
Online loans: 1% to 9%.
Bank loans typically offer the best terms and fees, which include interest rates and origination fees. And some banks, such as U.S. Bank and Chase, offer small-business loans that don’t have any origination fees.
While online lenders tend to have higher origination fees in general, there are exceptions. For example, Fundbox, a popular online lender, doesn’t charge origination fees on its business loans.
Although the origination fee charged by a lender affects the total cost of your loan, it should not be the only factor you consider. Some lenders may waive the origination fee or charge a low percentage and then recoup the expense by offering you a higher interest rate. Therefore, it’s important to look at the total borrowing cost of the loan.
How do origination fees affect your APR?
The annual percentage rate (APR) is the interest rate on the loan plus the fees charged by the lender, like origination fees. It tells you the total borrowing cost of your loan on an annual basis. Any fees that a lender charges end up increasing your borrowing cost. If your lender charges fees, your APR will be higher than your interest rate. If no fees are charged by the lender, your APR will typically be the same as your loan interest rate.
Here are a few examples that show how interest rates, origination fees and loan terms can affect the APR for a $100,000 loan.
Loan amount | Term | Interest rate | Origination fee | APR | |
|---|---|---|---|---|---|
Loan A | $100,000. | 12 months. | 10%. | 1%. | 11.89%. |
Loan B | $100,000. | 12 months. | 8%. | 5%. | 17.28%. |
Loan C | $100,000. | 60 months. | 8%. | 5%. | 10.09%. |
Loan A demonstrates the general effect an origination fee has on the APR. When looking at Loan B, we see that a lower interest rate with a high origination fee can result in a significantly higher APR, especially on a short-term loan. However, Loan C shows that a high origination fee has less of an impact on APR when a loan has a longer term.
Calculating the APR for different loan offers can help you weigh your options and determine how much an origination fee is affecting the overall cost of your loan.
Tips to minimize origination fees
When you’re shopping for a business loan, you’ll often come across products with origination fees. Here are some tips to minimize the impact of origination fees:
Know the APR of the loan. Whether the lender provides it or you calculate it yourself, knowing the APR for a loan is just as important as knowing the interest rate. It is a valuable tool in comparing loan offers and deciding the best option for your business.
Negotiate with the lender. You might be able to negotiate a lower origination fee, without increasing the interest rate, if you’re borrowing a large amount of money. Similarly, if you’re a creditworthy borrower or willing to put up collateral, you might be able to use those factors to bring down the fee.
Leverage your borrowing history. If you’ve worked with the same lender in the past and have a positive repayment history with them, they might be willing to reduce or eliminate your origination fee.
Deduct the origination fee on your taxes, if applicable. Loan fees, including origination fees, may be a tax deductible business expense. Business expenses can be used to reduce your taxable income, which lowers your overall tax burden.
Origination fees are something to watch out for, but they don’t necessarily have to be a deal breaker, especially when looking at the overall cost of the loan.
A version of this article originally appeared on Fundera, a subsidiary of NerdWallet.
Rieva Lesonsky, a freelance writer, contributed to this article.
