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How much does a business loan cost?
Not sure what to expect when it comes to business loans? Here's what you might pay.
Knowing the costs your business will face can help you find an affordable loan that fits your particular needs. Costs can vary widely between lenders and also depend on factors like your credit score, time in business, revenue and more. New businesses in particular might be in for a long comparison process before the application.
How much does a business loan cost?
There are two factors that impact how much a business loan costs: the interest you’re charged to borrow a loan and the fees that you need to pay before, during and after the loan process. The combine to create the annual percentage rate (APR), which is the cost of your loan for every year you have a balance.
Interest rate is almost always the main cost of your loan and will depend on a variety of factors, including the current market. The major influence will be whether your loan has a fixed or variable interest rate. A fixed interest rate remains the same over the life of your loan, while a variable interest rate changes with the market, though lenders usually have a minimum base interest rate you’ll be charged.
The collateral you provide with your loan will also play a role. Unsecured loans, or loans that don’t require any collateral, will generally have higher interest rates than secured loans. This is because lenders face a higher risk when giving out unsecured loans. If you fail to repay, it won’t be able to take the collateral and sell it to recoup its losses.
Your business’s credit score — and your own, if your business is new — will also impact your loan. So will your business plan, revenue, industry and the type of loan you’re seeking. Compare business loan rates to be sure you know the general range lenders charge for interest.
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7 typical business loan fees
- Origination fee. Expect to pay: 1% to 5% of your loan amount.
Lenders charge origination fees to cover the costs of processing your loan application including verifying information, credit checks and administrative expenses. They typically take your origination fee directly out of your loan amount, so you’ll want to calculate how much you need to apply for to get the amount you want after the origination fee is subtracted.
- Withdrawal fee. Expect to pay: $1 to $4 per withdrawal.
If your loan is issued with a Visa or debit card, you may pay a fee for every transaction executed with your card, especially if you’re withdrawing from another bank’s ATM.
- Wire transfer fee.Expect to pay: $10 to $20 per transfer.
This fee is meant to cover the extra cost of sending a payment via wire transfer rather than direct debit.
- Late payment fee.Expect to pay: Either $10 to $35 or between 3% and 5% of the amount due.
Lenders usually charge a fee if a repayment is late, typically after a grace period of 10 to 15 days. Read the terms of your loan to learn about your lender’s policy on late payments.
- Nonsufficient funds (NSF) fee. Expect to pay: Either $10 to $35 or between 3% and 5% of the amount due.
Lenders charge NSF fees if you set up autopay or otherwise authorized them to withdraw an amount from your account that is doesn’t have. It’s typically the same as your lender’s late fee.
- Prepayment penalty.Expect to pay: Cost varies widely.
If you settle the whole balance before the end of the loan term or make early repayments, you may be charged fees. Prepayment penalties vary widely depending on your loan type and lender. They can come as a flat fee, a percentage of the amount you owe or change depending on how much is left in your loan term. But don’t worry — some lenders don’t charge prepayment fees.
- SBA guarantee fee. Expect to pay: Up to 3.75% of the guaranteed portion, depending on the loan amount, term and program.
The Small Business Administration (SBA) requires all lenders to pay a fee in exchange for a government guarantee — essentially taking responsibility for the loan if it goes into default.
What interest rates are charged on a business loan?
The type of loan your business needs will influence how the interest rate is charged. There are plenty of things to know about interest before you get started, so read up on them before you start the borrowing process.
- Fixed interest rate. This rate remains the same for your whole loan term, which in turn keeps your payments the same each time they’re due.
- Variable interest rate. Your interest rate fluctuates throughout your loan term and your repayments can change.
- Factor rate. This is a decimal figure that is essentially a payment multiplier. The interest does not compound and is charged to the principal loan amount. It’s often applied to unsecured, short term business loans.
- Monthly fee. This type of cost structure may be used by invoice financing and factoring companies. The monthly rate is a percentage and is charged to the value of the invoices submitted.
Business loans are often amortized, meaning that you pay the same amount each month. Many have a monthly amortization, meaning that you make a repayment on interest and fees each month.
But some come with weekly, bi-weekly or even daily amortization. Ask your lender for an amortization schedule to plan for repayments before signing the business loan agreement.
Taking out a business loan is a big step. By calculating the cost of your loan options, you’ll be in a good position to make a smart borrowing decision that will benefit your business for years to come. However, there are a number of other factors that you need to consider when borrowing a business loan. Read up on how business loans work so you know exactly what to expect when you apply.
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