5 ways to avoid paying too much for a business loan
January 21, 2016
6 minutes to read
Opinions expressed by Contractor the contributors are theirs.
Coy on the costs. Brushing on the fine print. Push yourself to something bigger or more expensive than what you need. If you’re an entrepreneur, chances are you’ve had at least one uncomfortable encounter with a lender who just didn’t seem to have your best interests at heart.
Earlier in my career, my partners and I built a network of successful fitness companies. The business grew rapidly and we started looking for a loan to help us expand our profitable model into new markets. It was around this time that I got my first glimpse of the opaque bottoms of the traditional lending industry. We were shocked at the number of lenders who literally couldn’t produce an amortization and repayment schedule. And when we asked them to share their pricing structure and APRs? Crickets.
There are 28 million small businesses in the United States These entrepreneurs create two out of three net new jobs and employs half of the private sector workforce (around 120 million people!). They deserve better. They deserve an efficient and transparent way to meet their growing capital needs, and they deserve to understand the true cost of their loans.
The good news is that there are some simple tips you can use to eliminate bad apples and make sure you get a fair deal on your funding. If you’re looking for an injection of cash to start your business, here are five ways to avoid paying too much for a loan:
1. If they can’t tell you the APR, walk away.
Application fees, annual fees, service fees, set-up fees – you have the right to know the total cost of any loan offered to you so that you can easily compare it to other offers and make the right decision for your business.
Unfortunately, finance has traditionally been sold at prices that can be confusing or misleading – and the true cost of a loan is often not disclosed. Instead, some lenders quote “rates” that are calculated a little differently from an actual interest rate, so their products appear cheaper.
One of the best ways to do an apple-to-apple comparison on loan products is to calculate the APR (Annual Percentage Rate), a number that tells you all the costs for a year in one equivalent interest rate. This is the real cost of your loan because, unlike an interest rate, an APR also takes into account additional fees and charges often hidden in the fine print, and also standardizes how often you will need to make payments.
Many merchant cash advance lenders claim that they cannot calculate an APR or that an APR is irrelevant because they do not offer term loans. This is fundamentally wrong. They may not like it, but they sure can. There are products with high APRs that make sense for certain businesses in certain circumstances, but a lender should be able to advocate for this transparently and provide a borrower with the right information to make the right decision for their business. . A good lender will always be ready to help you calculate an APR, so you can accurately compare your options.
2. Do not accept prepayment penalties for the course.
Some credit products charge a fixed repayment amount, which prevents you from saving money by prepaying. It’s not always disclosed transparently, so if in doubt, ask the lender to explain how much you’ll have to repay if you repay earlier on a specific date. If it is greater than the unpaid principal, there is a penalty for early repayment. End of the story.
3. Beware of double soaks.
If you take out a new loan before paying off an existing loan from a lender, make sure you are not being unfairly double-charged for the unpaid portion of your loans. The new fixed costs should only be calculated on the basis of the Additional capital you received.
For example, a business owner who still owes $ 10,000 on a loan may take out a second loan for $ 25,000. The $ 10,000 could be transferred into the new loan so that it only receives $ 15,000 in new principal. However, if that person had to pay a fee on the total amount of $ 25,000, he would have effectively been billed twice on the outstanding amount of $ 10,000.
4. Do not support stacking.
Stacking occurs when a lender convinces you to add a loan or cash advance product in addition to another credit product that you already have with a different lender. In this situation, you might end up with several cash advances “stacked” on top of each other, each diverting a percentage of sales from reaching the business. This can quickly become a boa constrictor around your business’ cash flow.
Whether you are in a tough spot or want to seize an unexpected business opportunity, it’s important to remember that just because you need another infusion of capital doesn’t necessarily mean you need everything. new credit product. Instead, ask yourself if refinancing your existing debt can potentially lower your overall costs compared to the temporary boost you would get by taking out a new loan or cash advance.
There are two ways to do this: One option is to take your current term and extend it a little longer to reduce your monthly principal and interest payments. This will likely increase your rate, but could be a very reasonable strategy in the long run. The second and more tricky option is to find a loan product with a lower interest rate and refinance, provided that the origination fees and all other charges on the new loan are less than the lifetime difference between old and new interest rate payments.
5. Resist peer pressure.
Before you start looking for a loan, work with your accountant or financial advisor to determine how much money you actually need to meet the goals you have for your business. Avoid lenders who try to sell you a loan that is much larger than what you need or who try to force you to accept offers too quickly. Sometimes the allure of additional working capital can be tempting, but remember, it’s all about finding the financing that’s right for you.
To learn more about your rights to fair and transparent funding, see the Small Business Borrower Bill of Rights.