Origination fee

In plain terms

An origination fee — sometimes called an arrangement, facility or set-up fee — is what a lender charges for the work of assessing, approving and putting a loan in place. It's typically a percentage of the amount you borrow and is paid at the start, either deducted from the funds advanced or added to the balance.

If a £50,000 loan carries a 2% origination fee, that's £1,000. Deducted at drawdown, you'd receive £49,000 but repay against £50,000; added to the balance, you'd receive the full £50,000 and repay £51,000. Either way, the fee is part of the cost of the loan and separate from the interest you pay over the term.

Why it matters to your business

The origination fee is easy to overlook because it isn't part of the headline interest rate — but it changes the real cost of borrowing. A loan with a low rate and a hefty origination fee can be dearer overall than one with a slightly higher rate and no fee, particularly over short terms where there's little time for a lower rate to make up the difference.

It also affects how much cash actually reaches your account. If the fee is deducted upfront, you receive less than the face value of the loan — so if you need a specific sum to land, borrow enough to cover the fee. Reading the fee alongside the rate, and ideally as an APR that bundles both, is the only way to compare offers fairly. Our overview of business finance fees sets out the full picture.

A worked example

A company compares two £40,000 loans, each over 12 months. Lender A offers 9% interest with a 3% origination fee (£1,200). Lender B offers 11% interest with no origination fee.

On Lender A, interest of roughly £3,600 plus the £1,200 fee gives a total cost near £4,800. On Lender B, interest of roughly £4,400 with no fee gives a total cost near £4,400 — so the "higher rate" loan is actually cheaper once the fee is counted. Had the term been three years, the lower rate would likely have won, because the one-off fee would be spread thinner. The lesson: judge fees and rate together, against your term. (Illustrative figures.)

What to check before you sign

Before accepting a facility, get clear on the fee:

• How much, and on what? Confirm the percentage and whether it's calculated on the amount drawn or the full facility limit.
• Deducted or added? Know whether it reduces the cash you receive or increases the balance you repay.
• Refundable? Ask whether any of the fee is returned if you repay early or the loan doesn't complete.
• Is it in the APR? A quoted APR that includes the fee makes comparison far easier than rate-only quotes.

A transparent lender will set the origination fee out plainly in the offer. If a fee is vague or buried, treat that as a reason to ask more questions.