In Nigeria, small-scale farmers are reluctant to borrow from formal institutions because of high transaction costs. This paper examines the components and determinants of borrowing transaction costs and argues that unless the loan administrative strategies are simplified and channels of loan delivery diversified, farmers would continue to find it difficult to use formal loans. Borrowing transaction costs are defined as the administrative expenses and transportation cost incurred by borrowers as well as the opportunity costs of the time spent in negotiating, acquiring nd repaying thee loan. These costs are determined mainly by the loan size and borrowers' distance from the loan office. Group lending is suggested as a cost-reducing approach that will be beneficial to both lenders and borrowers.