Origination Fee

An origination fee is a one-time charge a lender collects for making a loan. It pays for the work of taking the application, underwriting the credit, preparing documents and closing. Lenders usually set it as a percentage of the loan amount. Private and real estate lenders often call each 1% a "point."

The math is simple. On a hypothetical $500,000 business loan with a 1% origination fee, the fee is $5,000. Most lenders net the fee from the funds at closing. In that case the borrower signs a note for $500,000 but receives $495,000, and still repays the full $500,000 plus interest. Some lenders instead collect the fee as a separate payment at closing.

An origination fee is different from other charges a borrower may see, such as third-party costs (appraisal, title, legal), an underwriting or processing fee, or an exit fee charged at payoff. The term sheet should list each one.

Why it matters for lenders

Origination fees are a meaningful part of a lender's income, especially for short-term bridge and fix-and-flip loans where interest runs for only a few months. They also raise the borrower's true cost of credit, which is why disclosure matters.

In the US, several states now have commercial financing disclosure laws that require certain business lenders and funders to show the total cost of financing, including fees, before the borrower signs. Which rules apply depends on the state, the product and the deal size, so the fee must be captured accurately at the time of the offer.

Accounting is the other issue. Under US accounting standards set by the Financial Accounting Standards Board (FASB) in ASC 310-20, lenders that follow generally accepted accounting principles (GAAP) generally defer loan fees, net of certain direct costs, and recognize them over the life of the loan as an adjustment to yield, rather than booking them all as income on day one. That calls for a schedule for each loan and accurate entries in the general ledger.

How it works in practice

A real estate lender approves a $1 million bridge loan with two points. At closing, the closing statement shows the $20,000 fee deducted from proceeds. The disbursement team wires the net amount to the title company.

Finance then books the fee as deferred income and sets up a schedule to recognize it over the 12-month term. If the borrower pays off early, the remaining deferred fee is recognized at payoff.

When fees are tracked in a closing spreadsheet, the fee on the statement, the fee in the ledger and the fee on the disclosure can differ. Recording the fee once on the loan, and posting it to the ledger from there, keeps all three the same.