Overview |
What Are Closing Costs?
Closing costs are one-time expenses required to close a loan. These costs cover the work involved in reviewing, documenting, and closing a financing transaction and are separate from interest rate and monthly loan payments.
In most business financing transactions, closing costs exist because multiple parties are involved in the process. This can include the lender, third-party service providers, and government agencies.
Closing costs are typically incurred at or near the time the loan closes. Understanding closing costs upfront helps borrowers better plan for the total cost of financing and avoid surprises later in the process.
How are Closing Costs Determined?
Closing costs are not fixed or standardized across all loans. They are determined by a combination of factors related to the loan itself and the work required to close the transaction. The size of the loan, the purpose of the financing, and the overall complexity of the deal all play a role. Larger or more complex loans typically require more review, documentation, and coordination, which can increase closing costs.
Lender requirements also affect closing costs. Different lenders may require varying levels of underwriting, legal review, and third-party reports depending on their internal policies and risk standards.
In addition, some closing costs are driven by third-party providers rather than the lender. These costs are often based on market pricing and can vary by location, timing, and the specific services required. For this reason, closing costs are usually estimated early in the process and finalized closer to closing, once the full scope of the transaction is known.
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Examples of Closing Costs:
The examples below illustrate common types of closing costs borrowers may encounter, along with general explanations and typical cost ranges. Not every loan will include all of these items.
Legal Counsel:
These are legal fees incurred by the lender to prepare, review, and finalize loan documents. This includes drafting loan agreements and coordinating the closing to ensure the loan is properly documented and legally enforceable.
Legal costs are often higher in transactions involving real estate, multiple borrowing entities, or more complex collateral structures.
Typical Range: $5,000 – $15,000
Business Valuation:
A business valuation may be required when financing involves the acquisition of an existing business or a change in ownership. The valuation provides an independent assessment of the business’s fair market value.
The cost depends on the size of the business, financial complexity, and the valuation approach required.
Typical Range: $2,000 – $5,000
Environmental Reports (Phase I and Phase II):
Environmental reports may be required when a building or land is being purchased as part of a loan transaction. These reports are used to identify potential environmental risks that could impact the property’s value or create future risk.
Lenders typically require environmental reports to confirm that the property is not affected by contamination issues such as hazardous substances.
Typical Range: $1,000 – $5,000
Residential Appraisal
A residential appraisal may be required when residential real estate is pledged as collateral. The appraisal establishes an independent estimate of the property’s value for collateral purposes.
Typical Range: $500 - $1,250
Loan Packaging or Processing Fee:
A loan packaging or processing fee may be charged to cover the preparation, coordination, and submission of the loan file. This includes organizing third-party reports and managing the file through underwriting and closing.
Typical Range: $2,000 – $3,000
Miscellaneous Costs
This category typically includes smaller third-party or administrative expenses incurred during the closing process. These may include filing fees, taxes, lien searches, recording costs, or other transaction-related expenses.
Typical Range: $500 - $1,500
How Closing Costs Are Typically Paid
In most loan transactions, closing costs are included in the total loan amount and financed over the life of the loan. This means the borrower does not pay these costs entirely out of pocket at closing, but instead repays them over the loan term, most commonly over 10 years or 25 years depending on the structure of the financing.
Some third-party costs may be incurred earlier in the process, particularly reports or inspections required during underwriting, such as appraisals, environmental reports, or valuation work. Even when these costs are paid upfront, they are effectively rolled into the overall financing once the loan closes.
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