Business Loan Rates and Fees

While shopping for a business loan it is important to have the right expectations about interest rates and closing fees. If you have every applied for a business loan you know the interest rates and fees are typically higher than consumer loans. This will be a point of frustration for you if you do not have the right expectations.

There are several reasons why banks and credit unions will price interest rates higher on business loans. A business banking loan will usually stay on the books of the bank or credit union longer than a consumer loan. Often consumer loans are sold after they are originated on the secondary market which lessens the risk for the lender. A business also carries more risk than a consumer loan. There are many industry factors that could affect whether a business would be likely to repay which increases the risk.

For these reasons and many others business loans will have a higher interest rate. Interest rates can be fixed or variable. Typically rates are priced from one of three general indexes namely Prime, Treasury Constant Maturity (TCM), and Libor. These rates could adjust monthly, quarterly, annually, and every 3 or 5  years. An interest rate on a business loan could save you thousands a month in interest expenses. Make sure you know how your loan is priced today and how it will adjust in the future. Variable rates will typically be lower. Fixed rates will hedge your risk against economic factors and inflation that could push rates up. The financial institutions know this so expect your rate to be higher if you fix it.

Closings costs are typically higher as well. Each loan program has a a specific set of fees. Revolving lines will normally have a 1% annual origination fee. SBA loans will have an SBA guarantee fee, which is paid directly to the government, and a bank origination fee. If real estate is involved you can expect an appraisal which could cost $3,000 or more depending on the complexity of the loan. Title work will be another fee you should expect and will be based on the loan amount. Some banks and credit unions charge an additional fee for construction monitoring which could be as high as 1.5%. The remaining fees are nominal compared with what we have already mentioned. Make sure you ask your lender what fees to expect when you discuss your loan request.

You can save a lot of money in the long run by making good decisions around how your loan is priced. It may be worth paying a few extra dollars today to ensure a fixed rate in the future; however, it may be wise to have a low rate and fix it when rates start to climb. The important thing is to be aware so you can ask your lender the right questions.

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