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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 a manageable 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.
Interest and fees determine a business loan's total cost
Both the interest you’re charged to borrow a loan and the fees that you need to pay before, during and after the loan process are the main players in the final total of your business loan. They combine to create the annual percentage rate (APR), which is the cost of your loan for every year you have a balance.
Use the APR to compare loan costs
The APR gives an overall view of each loan's cost per year, which makes it an excellent comparison tool. It'll help you determine if the fees you’re charged and the loan amount and term suit your business’s needs. And with every comparison, make sure your business can afford the monthly repayments before signing on for a loan.
The interest rate is almost always your loan's main cost that depends 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 — but lenders usually charge a minimum base interest rate.
The collateral you provide with your loan will also play a role: Unsecured loans — loans that don’t require any collateral — generally have higher interest rates than secured loans. That's because a lender face a higher risk when giving out unsecured loans. If you fail to repay, it won’t be able to use the collateral and sell it to recoup its losses.
Your business’s credit score — and your personal score, 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. To be sure you know the general range lenders charge for interest, compare business loan rates.
The term you choose will also factor in to the amount of interest you'll pay. Business loan terms can be as short as one month or as long as ten years — it all depends on the type of loan and the lender you choose to work with. Remember that short-term loans may be more expensive up front than long-term loans, but you'll end up paying less interest overall with a shorter term.
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7 typical business loan fees
- Origination fee covers 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. Expect to pay: 1% to 5% of your loan amount.
- Withdrawal fee for every transaction applied to your Visa or debit card, if your loan is issued using a card — especially if you’re withdrawing from another bank’s ATM. Expect to pay: $1 to $4 per withdrawal.
- Wire transfer fee is meant to cover the extra cost of sending a payment via wire transfer rather than direct debit. Expect to pay: $10 to $20 per transfer.
- Late payment fees are what lenders usually charge 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. Expect to pay: Either $10 to $35 or between 3% and 5% of the amount due.
- Nonsufficient funds (NSF) fee is what your lender will charge you for any preauthorized withdrawals that your account can't cover.
NSF charges are typically the same as your lender’s late fee. Expect to pay: Either $10 to $35 or between 3% and 5% of the amount due.
- Prepayment penalties vary widely depending on your loan type and lender. If you settle the whole balance before the end of the loan term or make early repayments, you might get charged fees. 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. Expect to pay: Cost varies widely.
- SBA guarantee fee is a fee the Small Business Administration (SBA) requires all lenders to pay in exchange for a government guarantee — essentially taking responsibility for the loan if it goes into default. Expect to pay: Up to 3.75% of the guaranteed portion, depending on the loan amount, term and program.
Several factors determine the interest you're charged
The type of loan your business needs will influence how the lender charges interest rates. 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 rates remain the same for your whole loan term, which in turn keeps your payments the same each time they’re due.
- Variable interest rates fluctuate throughout your loan term and your repayments can change.
- Factor rates are decimal figures that are essentially payment multipliers. The interest doesn't compound and is charged to the principal loan amount. Factor rates are often applied to unsecured, short-term business loans.
- Monthly rates are cost structures invoice financing and factoring companies might use. The monthly rate is a percentage charged to the value of submitted invoices.
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, biweekly 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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