An origination fee is a one-time charge lenders use to cover administrative costs for processing, underwriting, and funding a loan. Some lenders use origination fees as an additional way to offset their risk with borrowers who have limited credit history or weaker financials.
Borrowers will pay the origination fee in one of three ways:
- Up front in cash
- Deducted from the proceeds
- Added to the loan balance
How borrowers pay the origination fee changes the loan’s total cost because it affects the annual percentage rate (APR). The APR is higher than the stated interest rate because the APR adjusts the interest rate to account for the annual cost of all fees. You can calculate APR to compare offers and negotiate a lower origination fee by showing lenders how you’re getting a lower APR elsewhere.
Ready to learn more? Here’s what origination fees generally cost, how they compare to APRs, and what to expect as you apply for a small business loan.
What Origination Fees Cost
Origination fees generally cost 0.5% to 1% of the amount you borrow, but they can go as high as 5% to 10% for high-risk borrowers. For smaller loans, some lenders will charge a flat fee instead of a percentage to cover their administrative costs, since a percentage may be too small. For large loans where a percentage will be too much for borrowers to agree to, lenders may charge a flat fee in these cases too. Other lenders may offer $0 origination fees as part of a promotion to drive more business, but they may recover the cost elsewhere through higher interest rates.
If you’re a new business, or you have a poor credit history, lenders might increase the origination fee to offset their risk. Knowing this information gives you the chance to negotiate a lower or waived origination fee if you can show that you have strong credit and a proven business record.
Once you have the cost of the origination fee itself, here is how you calculate its impact on the total cost of the loan.
Origination Fees and APRs
The origination fee and how you pay it changes the loan’s total cost, called the annual percentage rate (APR), depending on whether it is added to the principal or not. The APR is the only true apples-to-apples number that compares business loan offers from different lenders including all the fees and how you pay those fees.
Paying cash up front does not change the APR, since it is like any other cash expense. Meanwhile, deducting the origination fee from the amount borrowed or adding it to the loan will make the APR higher than the interest rate on the loan.
This example shows how different interest rates give you the same APR depending on how you pay the 1% origination fee:
| Scenario | Interest Rate | Origination Fee | How It Is Paid | Monthly Payments | Effective APR |
| No Fee | 10.00% | $0 | — | $3,226.72 | ~10.47% |
| Fee Deducted | 9.27% | $1,000 | Deducted from proceeds | $3,194.50 | ~10.47% |
| Fee Added | 9.35% | $1,000 | Added to principal | $3,226.76 | ~10.47% |
Why does the APR remain consistent regardless of how the fee is handled? Deducting it increases APR by keeping the monthly payments the same but lowering the total cash you actually get. Adding it to the amount borrowed increases the monthly payment while keeping the cash you get the same.
In this example, it’s best to use APR when comparing loans instead of relying on interest rates or origination fees alone. By understanding the total cost of the loan, you’re able to negotiate more effectively.
Note: If you’re applying for an SBA loan, you won’t have to do any negotiation since the SBA sets standard fees.
SBA Loans and Origination Fees
Origination fees for SBA loans are called the guarantee fee, or guaranty fee, and they’re different depending on how much you borrow. Some loans qualify for 0% upfront fees, including loans to manufacturers under $950,000 and SBA Express loans to veteran-owned businesses.
Origination fees are an upfront fee lenders charge to cover costs and offset risk. By doing an APR calculation, you’ll be better able to make decisions about what financing offer to choose.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
