Origination Fee Definition | Business Lending Glossary
What is a loan origination fee? Understand how origination fees affect your borrowing cost, how they fit into APR, and how to compare lenders.
Definition
An upfront fee charged by a lender to process and underwrite a loan, typically expressed as a percentage of the loan amount.
Explanation
Origination fees cover the lender's administrative and underwriting costs for creating a new loan. They are typically deducted from the loan proceeds at closing — meaning if you borrow $100,000 with a 2% origination fee, you receive $98,000 but repay the full $100,000 plus interest. Origination fees are included in APR calculations, which is why APR is often higher than the stated interest rate. They vary widely: SBA loans have regulated fees tied to loan size, traditional bank loans may have no fee or 0.5–2%, and alternative lenders may charge 3–5% or more.
Example
A business applies for a $200,000 SBA 7(a) loan. The SBA charges an origination fee of 3% ($6,000), which is added to the loan balance. The business receives $200,000 at closing but the loan starts at $206,000.
Why It Matters
Origination fees are a significant upfront cost that directly affects the effective cost of your loan. A high origination fee on a short-term loan can dramatically increase the equivalent APR. Always ask lenders to disclose all fees upfront and factor them into your total cost comparison.
Frequently asked questions
Are origination fees negotiable?
In some cases, yes — particularly with larger loan amounts or strong borrower profiles. Traditional banks and credit unions are more likely to negotiate than alternative lenders with standardized pricing models. It never hurts to ask.
Is an origination fee the same as a prepayment penalty?
No. An origination fee is charged at the beginning of the loan for processing it. A prepayment penalty is charged if you pay the loan off early. Some loans have both; many have neither. Always review the loan agreement for both before signing.
