Business Loan Fees: A CFO’s Guide to Origination
& Due Diligence Fees ($1M – $100M)
Analysis: What Are Business Loan Fees Really Costing You?
This is an analysis of loan origination and due diligence
fees, primarily for business loans in the $1-$100 million range. Some of these
are for acquisitions or expansion and involve brokers/agents. Some are lines of
credit and some term loans.
I received over $100 million of term sheets from various
lenders while I was a CFO. Here is the wording from one as it relates to
up-front fees:
A deposit (“Deposit”) equal to $25,000 toward
Transaction Expenses shall be due upon acceptance of this Term Sheet.
That $25,000 is just one example. I’ve seen $10k to $150k
requested before a lender has even started real underwriting. That’s why you
need to understand which fees are legitimate and which are a profit center for
lenders who have no intention of closing.
SEC Warning: Advance Fee Loan Scams Are Real
This is an SEC alert related to fake fee schemes that every
CFO should read: SEC Advance Fee Fraud Alert
Some lenders have little intention of closing loans, or
should be able to figure out quickly (without much expense incurred) that a
company isn’t a good credit risk as compared to their underwriter’s
requirements. However, they make a lot of money on these fees so they keep
charging them. CFOs and others should be very careful in paying upfront fees.
Due diligence on the lender needs to be done to protect a company’s assets.
My CFO rule: If a lender can’t clearly explain
what the $25k covers, who it goes to, and when it’s refundable, it’s a red
flag. A legitimate lender can show you a budget: legal, appraisal, third-party
QOE, background checks.
When a Business Decides to Apply for a Loan: The Real
Cost of Financing
When a business decides to apply for a loan, they should be
aware of the fees and costs associated with the application process and the due
diligence required to secure financing. These fees vary depending on the lender
and the complexity of the application, but they can add up quickly and
significantly impact the cost of the loan.
All of these fees need to be added to the interest costs to
determine the real, or effective interest rate. A 7% loan with 5% in upfront
fees over 3 years is not a 7% loan.
Fee Types: What Lenders Charge for Business Loans $1M
– $100M
Here are the fees businesses might encounter during the loan
application and due diligence process:
1. Application / Good Faith Deposit: $2,500 – $150,000
Some lenders charge a fee simply for submitting an application. This is usually
a non-refundable fee and may range from a few hundred to a few thousand dollars
on small SBA loans, but on middle-market deals it becomes a deposit toward
transaction expenses.
CFO Tip: Ask for it to be applied to closing, refundable if lender
declines, and held in escrow or client trust account, not wired to a broker
personally.
2. Loan Origination Fee: 0.5% – 2.5% of loan amount
This is the lender’s profit for making the loan. On a $10M loan, 1% = $100k. On
a $1M line of credit, often 0.5%. This is negotiable, especially if you have
competing term sheets. Always ask if this is included in the APR disclosure.
3. Credit Report & Background Check Fee: $30 – $2,500
Lenders often require a credit report to assess a borrower’s creditworthiness
and to determine the interest rate for the loan. On personal guarantee deals,
it’s $30-$100. On larger deals, it becomes a full background check on officers
and 20%+ owners – $500-$2,500.
4. Appraisal / Collateral Evaluation Fee: $300 – $25,000+
If the loan requires collateral, such as real estate, the lender may require an
appraisal to determine its value. This fee can range from $300 to $500 for a
small commercial property, to $15k-$25k for specialized equipment or a full
business appraisal. If the collateral is inventory and receivables, expect a
field audit $3k-$10k.
5. Legal Fees: $5,000 – $75,000+
The lender may require a borrower to pay for legal fees associated with
drafting loan documents, reviewing contracts, or conducting due diligence.
These can vary greatly depending on the complexity of the loan and typically
range from several hundred to several thousand dollars on small loans, but on a
$20M acquisition loan with intercreditor agreements, $35k-$75k in lender legal
is common. You also pay your own attorney – budget the same amount.
6. Due Diligence / QOE Fee: $10,000 – $100,000
Finally, the lender may charge a fee for conducting due diligence to review the
borrower’s financial history, business operations, and other factors to assess
the risk of the loan. This fee can vary widely depending on the lender, the
size of the loan, and the complexity of the review. On deals over $10M, lenders
often require a Quality of Earnings (QOE) report from a CPA firm like ours.
That’s $25k-$75k paid to the accounting firm, not the lender, but it’s part of
your cost of capital.
7. Broker / Intermediary Fee: 1% – 5%
If you used a loan broker, they charge on success. Legitimate brokers charge at
closing. If a broker wants a large fee before you get a term
sheet from a real bank, that’s the advance fee scam.
Fee Comparison Table: What Should You Actually Pay?
Loan Size | Origination | Legal (Lender) | Due Diligence / Appraisal | Total Upfront (excl. QOE) |
$1M Line of Credit | $5k-$15k | $3k-$7k | $1k-$3k | $9k-$25k |
$10M Term Loan | $50k-$150k | $15k-$40k | $5k-$25k | $70k-$215k |
$50M Acquisition | $250k-$1M | $50k-$100k | $25k-$100k | $325k-$1.2M |
If someone quotes you $25k deposit on a $1M loan just to
“review” – that’s 2.5% before you even have approval. Push back.
How to Calculate the Effective Interest Rate With
Fees
It’s important to keep in mind that while these fees can be
expensive, the cost of not obtaining financing can be even greater for a
business in need of capital. Business owners should carefully weigh the costs
and benefits of a loan before applying and investigate multiple lenders to
compare fee structures.
Here’s the formula CFOs use:
Effective Rate = (Total Interest + Total Fees amortized
over loan term) / Average Outstanding Balance
Example: $5M loan at 8% interest, 3-year term, $75k
origination + $25k legal = $100k fees.
$100k / 3 years = $33,333 per year extra cost
Effective rate is closer to 8.66%, not 8%.
If the loan has a 1-year term and you refinance annually,
those fees make the effective rate 10%+. That’s why short-term hard money looks
cheap until you add fees.
I build this effective rate analysis for clients when
comparing term sheets – one term sheet with 7.5% and high fees can be more
expensive than 8.25% with no fees.
CFO Due Diligence on the LENDER: How to Protect Your
Company
Before you wire any fee:
- Check
the lender: Is it a real FDIC bank, licensed lender, or a website
with no address? Search [Lender Name] + fraud + SEC and check
California DFPI licensing. - Get
references: Ask for 3 recent closed deals in your size range.
Call them. - Fee
refund language: Get in writing: “Deposit refundable if
lender declines after underwriting” and “Applied to closing
costs if closed.” - Never
pay a broker upfront via Zelle/wire to a personal account: Legit
fees go to law firm trust account or escrow, with an invoice. - Attorney
review: Have your business attorney review the term sheet fee
section before signing. For $500 in legal review you can save $25k.
As a CFO who has raised $35M in equity and debt, my job was
to spot lenders who were fee shopping versus actually lending.
Conclusion: Compare More Than Rate
In conclusion, when applying for a loan, businesses should
be prepared to encounter various fees, including application, credit report,
appraisal, legal, and due diligence fees. Therefore, it is important for
businesses to research and compare multiple lenders to find the one with the
most reasonable fee structure that meets their needs.
Don’t just compare interest rate – compare total cost to
close, total cost if you pay off early, covenants, and what happens if you need
to amend.
If you’re reviewing term sheets in the $1M-$100M range and
want a second set of eyes on fees, origination, and effective rate, contact me
at hpaccounting.com/contact. I review term sheets as part of fractional CFO and
due diligence services in Fremont and the Bay Area.hpaccounting.com