Key takeaways
- A business loan origination fee is a one-time, upfront fee charged by lenders for processing and funding your loan application.
- The fee is typically 1% to 5% of the loan amount, but can reach as high as 10%.
- If you have a strong borrowing profile or a large loan amount, you may be able to negotiate with your lender for a lower origination fee.
A business loan origination fee is a key part of your total borrowing cost. Along with the interest rate, this upfront fee can make a big difference when you’re comparing small-business loans and choosing the best financing for your 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 various types — term loans, 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 the SBA guarantee fee.
🤓 Nerdy Tip
Business lines of credit usually don’t have origination fees. Instead, they may have:
- Annual fee. Charged as a flat fee or percentage of your credit line amount every year your account is active.
- Draw fee. Charged as a percentage of the amount you withdraw each time you use your credit line.
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 3% origination fee that is applied to Fora Financial’s term loans.
For example, on a $100,000 loan with a 1% origination fee, the fee would be $1,000. If the lender subtracts this amount before disbursing the loan, you’d receive $99,000 — but you’d still repay the full $100,000.
The origination fee applied to your loan can 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 origination 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 10%.
Business 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, eLease, an equipment lender, doesn’t charge origination fees on its financing (but does charge a small document fee of $150 to $195).
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 (like origination fees) charged by the lender. 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's a valuable tool for 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 qualify as a tax-deductible business expense. Business expenses can be used to reduce your taxable income, which lowers your overall tax burden.
Frequently asked questions
How much are loan origination fees?
Origination fees vary significantly and some lenders don’t charge the fee at all. Bank loans typically offer the lowest origination fees with rates generally ranging from 0.5% to 1%. Online loans often have higher origination fees that may range from 1% to 10%.
Do SBA loans have origination fees?
SBA loans don’t have origination fees. However, depending on the type of loan and amount, borrowers may have to pay certain other loan fees. For example, SBA 7(a) loans require the borrower to pay an upfront SBA guarantee fee. And the SBA 504 program requires borrowers to pay a CDC processing fee, as well as a guarantee fee.
Are loan origination fees tax-deductible for a business?
Origination fees on a business loan may qualify as an interest expense and be tax-deductible. Consulting a tax professional can help you determine if the full amount is deductible or if you’ll need to prorate the amount over the term of the loan.
