Understanding Line Fees for Business Loans 

A line fee, pertinent to business loans like Lines of Credit (LOC), term loans, overdrafts, or other credit facilities, is a charge ensuring the availability of credit. Unlike interest, which applies to the loan balance, a line fee is based on the loan limit. 

Determining the Line Fee: What to Expect? 

The line fee varies based on credit type, lender, and provided security, reflecting the bank’s cost of capital. General guidelines include: 

• Residential security: Typically 0.3% to 1.0% of the loan limit annually. 
• Commercial security: Generally 1.0% to 2.0% of the loan limit annually. 

For instance, a $200,000 limit could incur a $2,000 monthly charge, even if only $50,000 is drawn over six months. Transaction fees, varying among lenders, may apply, with some offering fee-free transactions monthly. 

Understanding Line of Credit Fees: Why are They Charged? 

Exclusive to commercial or business loans, particularly lines of credit or overdrafts, line fees do not apply to residential loans. Unregulated commercial lending involves larger facilities, prompting banks to set rates and ongoing fees according to the application’s risk profile. 

Banks aim to mitigate risk and secure a baseline income from the facility. Monthly account-keeping fees, as a percentage of the LOC limit, serve this purpose. Banks apply this even if the loan is unused to cover potential losses and ensure profitability. 

Avoiding Line Fees: Is it Possible? 

For those needing a line of credit to manage cash flow or business growth, avoiding a line fee is possible. Using residential property as security, rather than commercial real estate, may secure approval for a residential LOC, exempt from line fees. 

Another exception is a hobby farm, potentially considered residential property if income remains within bank thresholds. Successful application presentation plays a crucial role in securing a residential line of credit without a line fee. 

Line Fees and Developers: A Common Challenge 

Commercial and residential developers often face significant challenges with line fees, impacting their overall costs.