Get Schooled: A Primer for Small Business Loan Fees

This communication is for informational purposes only and is not intended as financial or legal advice. You should consult a legal expert and/or accountant for your specific needs.

If you’re thinking of taking out a loan to grow your business, there’s plenty to think about.

You want to ensure that you take out an amount of money that will allow you to make upgrades to grow your business; you want the organization from which you borrow to be trustworthy; you want to make sure payback is in line with what your business can support. Something you may not have taken into account? Additional fees charged by your lending institution.

These fees along with your regular payback make up the “total borrowing cost” of your loan.

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What’s the difference between total borrowing cost and interest payments?

The total amount that you will pay back is a dollar value representing the principal amount of the loan plus interest and all fees (including origination fees, credit reporting fees, application fees, etc.). This is the borrowing cost.

Interest is an amount charged as payment for use of the money and is also a portion of a loan’s total borrowing cost. The annual percentage rate (APR) is the annualized cost for borrowing money averaged over the full term of the loan.

Let’s learn a little bit about some of the common small business loan fees associated with a loan’s borrowing cost.

What are small business loan fees?

Small business loans can enable business owners to grow and expand their businesses. Some lending institutions may charge a variety of fees.

Loan fees vary by institution, but they may include:

  • An application fee is charged by some lending institutions to process a loan application. The application fee varies depending on the institution (it might even be waived as part of a promo). Application fees are usually nonrefundable, even if the applicant is not granted credit.
  • An underwriting fee is similar to an application fee, and is charged for loan preparations. It is typically a percentage of the loan cost and is paid upon loan origination.
  • An origination fee is an up-front amount that is typically quoted as a percentage of the loan principal and accordingly deducted from the amount transferred to you at loan origination.
  • Draw fees are often similar to origination fees but typically apply to lines of credit and may be charged each time you draw money from your available line.
  • If you pay back your loan early, you may be responsible for a prepayment penalty.
  • If you’re late on your payments, you may be subject to a late payment fee.
  • There may also be a default rate triggered by late payment, where an additional interest rate is subsequently charged on the outstanding balance.

If you’re considering taking out a loan for your business, be sure to do your homework to understand all of the associated fees. A few questions you might ask include:

  • What is the total borrowing cost of this loan? Do you know exactly what you’re paying?
  • What does the application process for the loan look like?
  • How does repayment work for this loan?

You can find more information on evaluating a loan offer here.

For eligible Square sellers, Square Capital offers access to business loans to grow your business. Square Capital also features no hidden fees, and clearly shows the total amount you repay and the total cost of the loan. You’ll know exactly what you’re paying before you apply. Learn more about Square Capital.

Square Capital, LLC and Square Financial Services, Inc. are both wholly owned subsidiaries of Square, Inc. Square Capital, LLC d/b/a Square Capital of California, LLC in FL, GA, MT, and NY. All loans are issued by either Celtic Bank or Square Financial Services, Inc. Square Financial Services, Inc. and Celtic Bank are both Utah-Chartered Industrial Banks. Members FDIC, located in Salt Lake City, UT. The bank issuing your loan will be identified in your loan agreement. The individual authorized to act on behalf of the business must be a U.S. citizen or permanent resident and at least 18 years old. Loan eligibility is not guaranteed. All loans are subject to approval.