When applying for a small business loan, a merchant cash advance or equipment financing, most business owners are so hyper focused on getting the best rate that they fail to understand how fees can inflate the true cost of the transaction. In this article, we’ll cover what fees you’ll typically encounter when applying for small business financing.
If you’re a small business owner who feels rejected by their bank and concerned by the level of support from the government’s response to COVID, you’re certainly not alone. Working Capital has analyzed nearly 100 small business lenders and distilled down the list of the best lender options for those with bad credit. While some of the lenders we’ve highlighted advertise financing options for those with less than stellar business and personal credit, none guarantee approval. Keep in mind that small business lenders who don’t heavily weigh personal or business credit in their credit scoring algorithms may alternatively focus on the business’ monthly revenue, comparable credit, age of business, industry and its ability to weather another COVID-19 resurgence.
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Types of Business Loan Fees
Most commercial lending institutions, whether they are banks, merchant cash advance lenders or equipment leasing companies, charge a variety of fees in addition to the interest that they charge on a loan. While some lenders are open to negotiating fees with the applicant, others are not. After reading this article, you’ll be better prepared for what lenders charge what fees, what the typical fee amount is and with any luck what fees can be negotiated down or out altogether.
Origination Fee: An upfront fee charged to a commercial borrower for processing a loan application. Origination fees typically cost the borrower between 1%-6% of the total amount financed. In some cases, commercial lenders may charge a flat fee (for example, $350). Origination Fees are also known as discount fees or points, however in business transactions, they’re most commonly known as Origination Fees or “O-Fees.”
Some commercial lenders may include the origination fee in the total loan amount, meaning the borrower is lumping the fee together with the loan amount, and repaying interest on the origination fee as well. Origination Fees are most common in commercial mortgages, small business term loans, merchant cash advances and SBA 7(a) loans.
While some commercial lenders are open to reducing the origination fee, there are instances where borrowers may successfully negotiate the removal of the origination fee altogether. It never hurts to ask, so don’t assume that the fees associated with your loan are set in stone and can’t be reduced or removed.
Borrowers looking to finance large amounts may be able to negotiate a reduced origination fee because commercial lenders tend to vie for high quality business loans. Alternatively, on smaller loans (e.g. $50,000), it may prove more difficult to negotiate a reduced origination fee as the same amount of work is required to fund a $500,000 loan.
KEY TAKEAWAYS
- Origination fees range from a percentage of the loan amount to a flat fee.
- Some lenders will allow a borrower to finance the origination fee, however the borrower will end up repaying interest on both the loan amount plus the origination fee.
- It never hurts to ask if the origination fee can be removed or reduced.
Prepayment Penalty: Prepayment penalties represent a fee for paying off a loan prior to its maturity date. This fee is outlined in the loan contract and helps the lender recoup some of their costs associated with underwriting the loan and potentially paying the broker who helped originate the file. In the case of the most common SBA loan, the SBA 7(a), there is a prepayment penalty for loans with maturities of 15 years or more if the loan is prepaid within the first three years.
SBA 7(a) Prepayment Penalties (Years 1-3)
| If SBA 7(a) is prepaid at year one | If SBA 7(a) is prepaid at year two | If SBA 7(a) is prepaid at year three |
| 5% of total loan amount | 3% of total loan amount | 1% of total loan amount |
The SBA 504 loan, which is typically used to purchase new or used equipment or renovate a commercial property, also has a prepayment penalty.
Merchant cash advances are structured by lenders to advance future receivables to a commercial borrower. The nature of the financing is typically short-term (e.g. 3-24 months) and fees are based on factor rates and not interest rates. While there typically isn’t a prepayment penalty associated with merchant cash advances, there is generally a small discount applied should the merchant repay their advance prior to the end of the term. Typically, the merchant cash advance lender will give the greatest percentage discount in the early months of the loan and a lower percentage discount in each subsequent month. It’s worth noting that these discounts are only available to borrowers who prepay their advance by directly wiring or via ACH deposit to the lender. In instances where the merchant cash advance is prepaid by another lender, no prepayment discount will be applied since the borrower is not truly prepaying the note, but rather moving the loan to another lender.
KEY TAKEAWAYS
- Banks charge prepayment penalties on loans to recoup interest that they would normally collect over the term.
- Prepayment penalties are most common with SBA 7(a) and SBA 504 and range from 1% to 5%.
- Merchant cash advances don’t have a prepayment penalty, but also offer a very limited prepayment discount to borrowers. Any discount is only available to merchants who pay off their note directly and aren’t available if they move or consolidate their loan with another lender.
SBA Loan Guarantee Fee: When the SBA guarantees a loan, it tacks on a fee, known as the SBA guarantee fee. This fee is passed from the lender to the borrower. The SBA guarantees that the loan will be repaid the guaranteed portion of the loan in the event of default. This warrant helps to keep SBA loan rates low, while also offering lenders the ability to extend longer repayment terms.
SBA guarantee fees can range from 2% to 3.75% and can be tacked onto the overall loan proceeds. While these guarantee fees are only required on SBA 7(a) loans, all other types of SBA-guaranteed loans will also have fees that are either paid to the lender of the SBA itself.
SBA Loan Guarantee Fee Schedule
| SBA Loan Under $150,000 | SBA Loan $150,001-$700,000 | SBA Loan Above $700,000 | |
| SBA Guarantee Fee | 2% | 3% | 3.50% |
| Additional Fee on Loans Above $1MMM | N/A | N/A | 0.25% |
| Percent of Loan Guaranteed by the SBA | 85% | 75% | 75% up to $3.75MM |
SBA Loan Guarantee Fee Example
| SBA Loan Amount | Total Amount of the Loan Guaranteed by the SBA | SBA Loan Guarantee Fee | Guarantee Fee Breakdown |
| $100,000 | $85,000 (85%) | $2,000 | 2% of the $85,000 |
| $175,000 | $131,250 (75%) | $5,250 | 3% of $131,250 |
| $850,000 | $637,500 (75%) | $19,125 | 3% of $637,500 |
| $2MM | $1.5MM (75%) | $53, 750 | 3% of the first $1MM, plus 3.75 of the balance of the guaranteed portion ($500,000) |
KEY TAKEAWAYS
- Banks and financial institutions that are licensed SBA lenders, pass along a fee to the borrowers. Expect to pay a larger percentage on smaller loan sizes, or a smaller percentage on larger loan sizes. The SBA Guarantee fee ranges from 2%-3.75%. In some cases, fee waivers may be available for certain types of SBA loan programs.
- An SBA Guarantee Fee is assessed by the lender to offset the costs associated from the processing, underwriting and funding a loan on the SBA’s behalf.
Loan stacking fee: Merchant cash advance lenders offer business owners an advance rate based on the business’ revenue. A typical advance rate offered to a business ranges from 20% for conservative lenders to 35% for the more liberal ones. Given that these advances are a percentage of gross revenue, allowing businesses to take a larger percentage of gross can be calamitous since the payback period is short and the daily or weekly payment may impair their ability to cash flow their other expenses. To this end, most merchant cash advance lenders will monitor merchant bank accounts using third-party software like Finicty, Plaid, and Yodlee. Should the lender uncover the merchant has taken an additional advance, it is then up to their discretion if they would like to assess a 10% loan stacking fee or even hold the merchant in default. Should the lender assess the 10% stacking fee, the merchant is then responsible for their original advance amount, but also a 10% fee of the original advance. If the lender instead chooses to find the merchant in default, the merchant’s corporate name is submitted to a third-party resource which collects information on business entities that have defaulted on merchant cash advance lenders, a black list of sorts.
While it is the sole discretion of the lender to either assess the 10% stacking fee or hold the merchant in default, from our research we’ve found that the only time that the fee is assessed is when the merchant actually defaults on payment and the default judgement is awarded to the lender. In that case, the 10% loan stacking fee and legal fees are added to the balance outstanding.
KEY TAKEAWAYS
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Merchant cash advance lenders on average tend to advance between 20%-35% of
revenue. To protect both the merchant and the lender, the merchant cash
advance lender will bake an additional fee into their contract called a loan
stacking fee. While this fee is covered during the merchant interview prior
to the disbursement of funds, some merchants may forget or otherwise ignore.
Should the lender uncover that the merchant took on additional exposure, the
lender has two remedies:
- The lender can assess a 10% loan stacking fee added to the original advance amount.
- Alternatively, the lender may hold the merchant in default if it is uncovered that the merchant took on an additional position or advance.
Inspection Fee: This is a fee assessed by an equipment leasing company (lessor) for physically reviewing the equipment or collateral of a transaction. This inspection benefits both the lender and the end-user to the extent that the collateral can be viewed at the merchant’s location, delivered, installed and functioning.
Titled Vehicle Equipment Financing Inspection Fee
In instances where a borrower is financing a titled piece of equipment, like a truck or trailer, the inspection will generally be performed at the vendor or private-party location. There, the third-party inspector will assess the condition of the vehicle or trailer and inspect the Vehicle Identification Number (VIN), making sure that it matches the copy of title he received from the lessor. Following the inspection, a report is delivered to the lessor for review. For this service, which protects both the end-user financing the asset as well as the lessor, a relatively small fee is passed onto the borrower, usually $200-$500. From our research, we found the most common inspection fee to be $350, however most equipment lessors will only conduct inspections on transactions larger than $25,000 or when the borrower is financing a truck or trailer.
Equipment Financing Inspection Fees
For non-titled equipment financing transactions, the inspector may conduct a general inspection. This type of inspection includes certifying the address on the equipment financing contract matches the location address of the business visited. Additionally, inspectors will match the signage to the Doing- Business-As (DBA) name listed next to the corporation name on the contract. This certifies that the end-user names match the location name. Furthermore, an inspector may review the business licenses granted by the county’s board of equalization to ensure compliance is up to date. Non-titled equipment financing inspection fees can range from $150-$250.
Merchant Cash Advance Inspection Fees
Similar to equipment financing contracts, merchant cash advance lenders may also assess an inspection fee. This fee is generally assessed on new customers and not repeat or renewals.
Merchant cash advance lenders contract with third-party inspection companies like Quiktrak or RTR Services. In contrast to the thorough nature of an equipment financing inspection, merchant cash advance lenders generally opt for a less invasive inspection that solely certifies the name of the legal entity on the contract is the same business at the location address and that the business is operational. Therefore, a merchant cash advance inspection fee may take less than 15 minutes to complete and many only cost the merchant approximately $100.
KEY TAKEAWAYS
- Inspection Fees are assessed on equipment financing and merchant cash advance contracts.
- Fees for physical inspections on equipment financing contracts range from $150-250.
- Fees for physical inspections on merchant cash advance contracts are generally less thorough than equipment financing inspections and therefore may only cost the merchant $100.
Documentation fee: Documentation fees are a standard fee assessed by most commercial lenders that aim to recover the cost incurred from reviewing the application, its underwriting and funding.
Equipment Financing Documentation Fees
For most equipment financing contracts, we’ve found a standard documentation fee assessed to range from $125 to $300. Keep in mind that although an equipment leasing documentation fee may seem small when compared to other loan-type fees (e.g. SBA Loan Guarantee Fee), we’ve found that other fees are added to the contract as well. We’ll touch on what other equipment financing fees are assessed in this article.
Merchant Cash Advance Documentation Fees
In general, merchant cash advance lenders may charge a small documentation fee similar to equipment financing companies. However, this fee pales in comparison to origination fee and stacking fee that they may charge. Typically, we found that this fee may range from $100-$400.
KEY TAKEAWAYS
- Equipment financing lenders will assess documentation fees to help recoup the costs associated with processing, underwriting and funding a transaction. Those fees can range from $100-$500.
- Merchant cash advance lenders typically do not charge documentation fees, however some of the bad credit lenders may assess a documentation fee of $100-$400.
Equipment Financing Title Fee: This fee covers the cost of titling the vehicle, trailer or titled piece of equipment such as a wood chipper. While fees depend on the county and state of the title, fees assessed range cover the cost to assign or reassign the title, plus the tags for the vehicle for the current year.
Non-Sufficient Funds Fee (NSF): A non-sufficient funds fee or overdraft fee is assessed when a payment or withdrawal exceeds the available balance in the merchant’s checking account. To avoid the likelihood of a merchant bouncing their loan payment, most commercial lenders require ACH on their contracts today. Should a merchant not have enough funds to cover the ACH, an equipment financing company or merchant cash advance lender may assess a non-sufficient funds fee (NSF) of $50-$75.
Wire transfer fee: Typically, most commercial banks and financial institutions prefer Automated Clearing House (ACH) as a method of payment versus wire transfers. Wire transfers are administered by the U.S. Federal Reserve. They act as an intermediary between two entities who are looking to securely transfer funds. Once funds have been wired it is generally impossible to reverse the wire transfer. Alternatively, using ACH as a method to transfer funds is just as secure as a wire transfer, but can be reversed in some instances. The National Automated Clearing House Association (NACHA) has strict rules for ACH reversals, such as the ACH must be reversed in the first five days of the funds transfer.
For equipment financing transactions, should a merchant require a vendor to be wired, a typical wire transfer fee is $100. Alternatively, should a merchant require a merchant cash advance lender to wire their bank account to guarantee funds are available immediately, the fee can range from $100-$250.
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