What Each of the Fees Are With Business Lines of Credit 

There’s no shortage of advantages when it comes to having a business line of credit like how it refills once you pay the balance back, and that the money is there when you need it. But with these advantages comes fees, including ones that you already expect like interest, and some surprise ones like wire fees and returned payment penalties.   

If you’re curious about the fees that come with a business line of credit because you have one, are applying for one, or are choosing between a business line of credit and a business credit card, we’re ready to help. Here’s what each of the fees you may come across are, and when they apply.

Application 

The application fee is charged by the lender before any review or decision is made and is a way to compensate the lender for taking the time to review your application.  

Origination 

This is a one-time fee the lender charges once the account is open and is a percentage of the total amount being provided. If your company has a strong history of financial responsibility, a good business credit score, and can offer a strong amount of collateral, your business will be more in demand as you’re considered creditworthy.  

Interest 

Business lines of credit have built-in variable interest rates (ones that change based on market conditions) that are applied when there is an outstanding balance, meaning you withdrew money and don’t pay it back in full before the next cycle begins. Your interest rate can vary depending on the market, amount of cash available, your credit history, and risk levels. 

Annual 

Annual fees are payments the borrower makes each year to keep their business line of credit open. 

Withdrawal or draw 

Each time the borrower takes money from their business line of credit, a draw or withdrawal fee will normally apply. Much like an origination fee, the cost is a percentage of the amount you’re taking, and this is in addition to the interest fees if you don’t pay the balance in full before the first cycle comes due. 

If you draw $10,000 and have a 2% fee, you’ll be paying a draw fee of $200. When you have a balance of $5,000 left and a 5% interest rate, you’ll now pay an additional $250, making the cost of the drawn money $450.  

Inactivity 

This fee can range on average from $10 to $100 and it only gets charged when there is no activity for 6 months or 12 months. The lender charges it to encourage the borrower to use the funds and carry a balance so the lender can make money on interest, and to cover the cost of maintaining the account, including doing collateral valuations.   

Curtailment or prepayment 

Curtailments and prepayment fees are when the borrower pays the balance owed off before they were supposed to and triggers a fee that can be found in the terms of the business line of credit.  

Wire or ACH 

Not all lenders allow for same day withdrawals from a business line of credit, so an ACH or wire transfer may be needed from the account, especially if you’re short on time. With these types of draws, an extra fee can apply in addition to the draw fee. Wires are normally same-day withdrawals and ACH can be next-day or in one business day, which is why these two fees only apply when the borrower needs money for a time-sensitive transaction like getting a deposit on a piece of equipment. 

Failed payments 

There may be a penalty or fee applied if you make a payment that fails to clear as there are insufficient funds in your account. If this happens too often and/or you begin missing payments, you may go into default depending on the terms and conditions of your business line of credit.  A default can lead to the account being closed and a possible seizure and liquidation of collateral so the lender can recoup any losses if they do not begin getting payments from you. 

Late payments 

Paying the minimum amount due or making full payments late may result in a fee.  

Maintenance 

Maintenance fees are a way to cover the administrative costs of keeping your business line of credit open. They allow the lender to pay someone to keep track of collateral value, making sure you have the right terms and do not go into default, and work to see if you can get a larger amount when you’ve been in good standing for a long enough time.   

Appraisal 

Lenders have collateral appraised to make sure the value of the assets are what you say they are. This way they can recover their losses if they have to seize and sell the collateral if you default. It can be applied to real estate, equipment, stocks, or anything else you use. 

SBA guarantee 

When you take a business line of credit that is backed by the SBA, an SBA guarantee fee may be applied in addition to the lender’s fees and can go up to 3.75% of the guaranteed portion over $1 million, as the SBA will be incurring costs while evaluating and offering the credit account. The benefit for you as a borrower is that you have a better chance at getting approved compared to a line from a traditional bank or alternative lender as the SBA takes on part of the risk. The downside is it takes a lot longer to hear back, so if you’re in a rush, SBA guaranteed lines of credit are not a good option. 

Closing costs 

If you decide to close your business line of credit early or when the agreement terminates, there could be a fee associated with it.  

Business lines of credit are a perfect way to have cash available when you need it for larger purchases, but they come with fees that start before the account becomes available and can apply right to the end when you close the account. Work with your provider directly to find terms that work for your business needs. 

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.