Business Loan Calculator with Fees

Costs and Fees of Small Business Loans

It can be difficult to get a small business loan to start a new business. If you have been in business for a couple of years, however, you might be a good candidate for a small business loan. Business owners use small business loans for a variety of reasons such as investing in equipment and inventory, and consolidating previous debt. Before applying for a small business loan, research both the allowable uses for the loan proceeds as well as all of the potential costs and fees the lender may charge at closing and during the loan term.

Loan Costs and Fees at Closing

• Origination Fees: Lenders charge origination fees in order to pay for the time and expenses associated with processing the loan application, compiling the loan documents, and underwriting the loan. Origination fees may be a flat fee or a percent of the loan amount. The origination fee may be 1%-6% of the loan amount, and the borrower either pays the fee at closing or bundles the fee into the total loan amount.
• Packaging Fees: Packaging fees also cover the expenses and time associated with preparing the loan application documents, reviewing the application, and processing the final loan documents. Traditional lenders, however, don’t charge packaging fees. These fees are reserved for online lending platforms that collect loan requests and send them to multiple lending partners to review.
• Guarantee Fees: Small business loans from the SBA include a special government guarantee. The federal government protects the lender from loss by guaranteeing repayment of 85% of the loan amount in the event that the borrower defaults on the loan. Borrowers, however, do pay a fee for this guarantee if they receive a loan of $150,000 or more. For loans in the amount of $150,000-$700,000, the guarantee fee is 0.25% on loans with a term under one year and 3% on loans with a term over one year. Loans of $700,000 – $1 million include a 3.5% guarantee fee, and loans over $1 million include an additional 0.25% guarantee fee.

Loan Costs and Fees After Closing

• Servicing Fees: Borrowers sometimes find that they do not send their loan payments to the financial institution that originated the loan. The original lender may have sold the loan to another lender, or there may be another lender acting as the loan servicer. Loan servicers receive a fee for accepting and processing loan payments each month. Some loans include a processing fee to pay for the loan servicer.
• Prepayment Penalties: Small business loans often contain penalties for repaying the outstanding loan balance prior to loan maturity. So, it’s important to consider how much these fees can cost if you think there is a chance you’ll refinance or repay the loan early. Prepayment penalties are a percent of the outstanding loan balance and can apply for either the first few years of a loan or the entire loan term.
• Late Payment Fees: Lenders charge a variety of fees related to late payments. In addition to late payment fees, borrowers may be subject to fees for nonsufficient funds as well as payments made with a check or a wire transfer. Consider how these much these fees can cost you and how they differ among lenders.

Getting Approved for a Business Loan

Although banks have become more active in small business lending in recent years, it is still very difficult for most small businesses to qualify for a loan. Most banks require some form of collateral, which can be an obstacle for small businesses that don’t have assets or business owners who don’t want to risk their personal assets. As a result, many small businesses are turning to online lenders because most don’t require collateral. While it may be easier to qualify for a loan with an online lender, businesses can expect to pay higher loan costs because of it.

Regardless of whether you want to qualify for a bank business loan or a loan from an online lender, there are certain steps you must take to increase your chances of being approved.

Cash Flow

The main concern for any lender is whether you have the financial capacity to repay the loan. For a business that capacity is demonstrated by the strength of your cash flow. Bank lenders want to see at least a three-year history of cash flow growth and a projection of future cash flow. Banks typically want to see a full scale business plan that details how you plan to achieve your cash flow projections.

Online lenders care about cash flow as well, except they only need to see your prior year’s cash flow. Most online lenders require an annual cash flow of $50,000 to $100,000 over the last 12 months.

Credit History

For the best terms on a bank loan, your business should have a solid credit history. If your business has yet to build its own credit history, bank lenders will rely on your personal credit score. A score below 680 will probably disqualify you for a loan. Online lenders are more lenient, requiring only a personal credit score of between 550 to 650. The better your credit score, the more favorable loan terms you can qualify for. In either case, you should hold off applying for a business loan until you have taken every possible step to raise your credit score.

Research Lenders

To increase your chances of getting a loan, you should look for lenders who understand your business and industry. If they can see that you have deep industry knowledge and a sound plan for making money, they may be more willing to take a chance on your business. Online lenders utilize a sophisticated data base of market information to determine the prospects for a business.

Don’t Wait Until You Actually Need It

Most businesses need financing at some point, so business owners should plan well ahead of anticipated needs. The worst time to look for a loan is when your business actually needs it. A good business plan anticipates the need for financing. The time to build a relationship with a bank is not when you need a loan. Banks are always interested in building new relationships with business owners. Not only can they be a source of capital in the future; they can be a valuable source of advice and networking.