What Is an Arrangement Fee on a Business Loan?
Finn Murphy
Relationship Manager · Aug 18, 2024 · 5 min read
An arrangement fee is a one-off charge levied by a lender to set up a business loan facility. It is distinct from the interest rate and can have a meaningful impact on the total cost of borrowing, particularly for shorter-term facilities. Here is what you need to know before you sign.
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What arrangement fees cover and what they typically cost
An arrangement fee covers the lender's administration cost in setting up the facility: credit assessment, legal documentation, account setup, and the lender's operational overhead. It is sometimes called an origination fee, facility fee, or processing fee. For standard business loans, arrangement fees typically range from 1% to 3% of the loan amount, though some lenders charge a flat fee instead.
A £100,000 business loan with a 2% arrangement fee costs £2,000 upfront (or added to the loan balance). This £2,000 is in addition to the interest you pay over the term. On a 12-month loan, an arrangement fee of 2% adds approximately 2 percentage points to the effective annual cost. On a 5-year loan, the same fee is spread over a longer period and has less impact on the annual cost.
How to handle arrangement fees when comparing offers
Always compare the total amount repayable (including the arrangement fee) rather than just the headline interest rate. A loan at 8% APR with a 3% arrangement fee will cost more over its term than a loan at 10% APR with no arrangement fee for many term lengths. Ask every lender to confirm the total repayable inclusive of all fees.
Check whether the arrangement fee is deducted from the loan advance or added to the loan balance. If it is added to the balance, you will pay interest on the fee for the full term, increasing its true cost further. If you are offered the choice, deducting it from the advance (paying it immediately) is almost always cheaper over the full term.
"An arrangement fee is fine if the total cost including the fee is the best deal available. It becomes a problem when you compare only the interest rates and miss it entirely. Always ask for total repayable."
- Finn Murphy, Relationship Manager
Frequently Asked Questions
Is an arrangement fee always charged on a business loan?
No. Many fintech lenders charge no arrangement fee, particularly for smaller unsecured loans. Traditional lenders and brokers are more likely to charge arrangement fees for larger or structured transactions. Always ask whether a fee applies before receiving a formal offer.
The bottom line
Spark Finance presents all offers showing total repayable inclusive of arrangement fees so you can compare correctly. Start at apply.sparkfinance.co.uk.
Check your eligibilityAbout the author
Finn Murphy
Relationship Manager
Finn is a Relationship Manager at Spark Finance focused on asset finance and equipment funding for UK businesses. He has placed hire purchase, finance lease, and operating lease facilities across construction, healthcare, and manufacturing sectors.
