Business Loan Fees: Origination, Prepayment, and Everything Else

The interest rate on a business loan is only part of the cost. Fees can add meaningfully to your total expense — and some fee structures are more borrower-friendly than others. Understanding every potential fee before you sign protects you from unpleasant surprises.

Origination Fees: The Cost of Getting the Loan

An origination fee is a one-time fee charged when the loan is issued, typically calculated as a percentage of the loan amount. Common range: 1–5% of the loan, though SBA loans have specific fee schedules determined by loan size and term.

Origination fees are often deducted from the loan proceeds — meaning if you're approved for $100,000 with a 3% origination fee, you receive $97,000 but owe $100,000. Factor this into your capital planning. If you need $100,000 in hand, apply for $103,100 (which with the 3% fee produces $100,000 in proceeds).

Prepayment Penalties: The Cost of Paying Early

Some lenders — particularly those offering fixed-rate loans — charge a prepayment penalty if you pay off the loan before the scheduled maturity date. This compensates the lender for the interest income they lose when you repay early.

Prepayment penalties are most common on SBA loans (often a step-down penalty: 5% in year 1, 3% in year 2, 1% in year 3 for loans over 15 years) and on longer-term alternative loans. For short-term loans under 18 months, prepayment penalties are rare — most alternative lenders waive them or simply charge no additional fee for early payoff beyond the agreed-upon balance.

Draw Fees and Non-Usage Fees on Lines of Credit

Business lines of credit sometimes carry draw fees — a percentage of each draw amount (typically 0.5–2.5%). These fees make lines of credit more expensive than they initially appear. If you're drawing $20,000 with a 1.5% draw fee, your immediate cost is $300 before any interest begins.

Non-usage fees (also called maintenance fees) are charged monthly on lines of credit where you haven't drawn the full amount. These fees incentivize borrowers to use the facility rather than maintain it as a backstop. When evaluating a line of credit, calculate the annual cost including all draw fees and maintenance fees against the amount you realistically expect to use.

Factor Fees in MCAs: What You're Really Paying

Merchant cash advances don't use interest rates — they use factor rates and fee structures. In addition to the factor rate (e.g., 1.30 on $50,000 = $65,000 payback), some MCA providers charge additional administrative fees, origination fees, or UCC filing fees. These fees add to the total cost of capital beyond the factor rate.

When evaluating an MCA offer, ask for the total payback amount and all fees included in writing. The total payback amount minus the advance amount = your total financing cost. Compare total costs across multiple offers rather than comparing factor rates, which can be misleading when fee structures differ.