An origination fee on a business loan is a charge assessed by a lender for processing and initiating a new loan. This fee is typically expressed as a percentage of the total loan amount, though some lenders utilize a flat fee structure instead. 

Origination fees compensate the lender for administrative costs involved in originating loans, which may include credit checks, application processing, underwriting, and other related services. It is often paid upfront at the closing of the loan or deducted from the loan proceeds, reducing the amount of cash the borrower receives.

The origination fee adds to the overall cost of borrowing. Lenders are typically required to disclose the origination fee and other associated costs in the loan agreement and in the loan estimate provided during the application process. Borrowers should carefully review these documents to understand their total loan costs.

Example of an Origination Fee

Suppose a business applies for a loan of $250,000 with an origination fee of 1.5%.

The origination fee is calculated as follows:

Origination Fee = Loan Amount × Origination Fee Percentage 

Origination Fee = 250,000 × 0.015 = $3,750

So, the borrower would need to pay $3,750 upfront or have it deducted from the loan proceeds. If the fee is deducted, the borrower will receive $246,250 in cash.

Borrowers should consider the origination fee when assessing the total cost of a loan and compare offers from different lenders to ensure they are getting the best overall terms.