Business Loan Rates and Fees: 3 Things to Know

Understanding the type of interest rate on a business loan, its fees and annual percentage rate, can help you find the right financing.

Steve NicastroJune 11, 2019
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Taking time to understand how small-business loan rates and fees work puts you in a stronger position to choose the best loan option and save money as a business owner.

Here are three important things to know about rates and fees when shopping for a small-business loan — whether it’s a Small Business Administration loan, an online business loan or another type of financing.

1. Is the interest rate fixed or variable?

With a fixed-rate loan, the interest rate and monthly payment don't change over the life of the loan. Consistent payments make it easier to budget, since you won’t have to worry about your loan payments changing.

Term loans are fixed-rate loans that give you a lump sum of cash at closing that you repay in monthly installments. This type of loan is best for one-time business purchases and long-term financing needs, like funding a major business expansion, buying real estate or refinancing debt. SBA loan rates, for instance, are some of the most competitive in the market if you qualify.

A variable-rate loan may carry a lower initial interest rate than a fixed-rate loan, but the rate can rise or fall because it’s tied to an underlying index that fluctuates with the market. This means your payments can vary, and budgeting can be more difficult.

A business line of credit may come with a variable interest rate. It allows you to borrow money and pay it back continuously, like you would with a credit card. This type of loan is better for business owners who don’t need a set amount of money, but need easy access to cash, whether it’s for emergency funds or short-term working capital.

2. What are the loan fees?

Fees are often unavoidable and can add to the cost of your loan. Small-business lenders charge varying amounts for upfront fees — from 0% to 10% of the loan amount — depending on factors like the size of your loan, the length of the repayment term, your credit score and the type of business loan.

Your lender should be transparent about what each fee covers and explain any that you don’t understand.

Here are some common fees that may be included with a small-business loan:

  • Origination fee: An upfront fee charged for processing a new loan.

  • Underwriting fee: Fees collected by underwriters who review and verify the documents you’ve provided, including financial statements, personal bank statements, credit reports and tax returns.

  • Closing costs: Fees associated with servicing the loan such as a loan-packaging fee, a commercial real estate appraisal or a business valuation.

  • SBA loan guarantee fee: The SBA charges a guarantee fee of 0.25% to 3.75%, based on the size of the loan. The fee is charged to the lender but may be passed on to the borrower at closing.

3. What is the annual percentage rate?

The annual percentage rate represents the true cost of the loan. It includes not just the interest rate, but also the associated loan fees mentioned above.

The APR you receive will depend on a few factors, including your credit history, the revenue and profitability of your business, the total amount borrowed and the length of the repayment period.

Let’s say you have excellent credit and get approved for a $50,000 business loan with a five-year term and an APR of 15%. On this loan, you’ll make monthly payments of $1,190 and pay a total of $21,370 in interest.

What if you shop around and find a loan with a lower rate? With an APR of 10%, your monthly payment would drop by $128 and you would save $7,629 in total interest costs, according to NerdWallet’s business loan calculator.

Shop around and compare rates, because some lenders may offer lower APRs than others.

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