What is an Origination Fee?

An origination fee is a one-time charge that lenders assess to cover the costs of processing and underwriting your loan application. It is typically expressed as a percentage of the loan amount and deducted from your proceeds at closing.

How Origination Fees Work

Origination fees typically range from 0.5% to 3% for traditional business loans, though some alternative lenders charge up to 5% or more. The fee covers the lender administrative costs including credit review, document preparation, and underwriting.

Example Calculation

You are approved for a $200,000 term loan with a 2% origination fee. The fee equals $4,000 ($200,000 x 0.02). This amount is deducted at closing, so you receive $196,000 but owe payments on the full $200,000.

Impact on Your Loan Cost

Origination fees directly affect your APR. A loan with a lower interest rate but higher origination fee might cost more overall than one with higher interest and no fee, especially for shorter terms.

For a 5-year loan, a 2% origination fee adds roughly 0.4% to your effective annual rate. For a 1-year loan, that same 2% fee adds 2% to your effective rate.

Typical Fee Ranges

Origination fees vary by loan type:

• SBA 7(a) loans: Lender fees typically 0.5%-2.5% depending on loan size
• Bank term loans: Usually 0.5%-1.5%
• Online lenders: Often 1%-5%
• Lines of credit: May have origination fees or annual fees instead

Can You Negotiate Origination Fees?

Origination fees are sometimes negotiable, especially for strong borrowers or larger loans. If you have multiple offers, use them as leverage. Some lenders will reduce or waive fees to win your business.

However, be careful about lenders who advertise "no origination fee" if they compensate by charging higher interest rates or other fees. Always compare total loan cost, not individual fees.