When you’re considering business loan options, it’s easy to get caught up in the benefits of having cash on hand. You’ll finally have capital to pursue your next opportunity. Or, to take on a team of new employees and double your annual sales. But before you embark on this search, it’s also crucial to learn how to avoid small business loan ripoffs.
Fintech lending has made capital accessible, but there are plenty of lenders out there who don’t have your best intentions in mind.
The Business Financing Advisors at National created a resource with everything you need to know about avoiding small business loan ripoffs (and what your business lender doesn’t want you to know). In this post, we’ll outline some of the key points!
If you want to take the smart business financing route, then download it here for even more helpful tips about finding a trustworthy business lender.
How You Can Avoid Business Loan Ripoffs
Finding business loan ripoffs isn’t exactly difficult, but if this is your first rodeo, then you might not know what to look for.
The key to making it through this noise—with capital in tow and your credit score intact— is asking the right questions.
As you consider various lenders and deals, it’s important to diligently examine everything about it—from the fees, to the interest rates, and beyond. Asking these questions will help you raise the right red flags, and avoid entering the wrong agreement.
1. Should You Pay Upfront Fees?
When it comes to avoiding business loan ripoffs, fees are one of the very first things you should look out for.
Now, that’s not to say that you’ll never encounter business loan fees—you likely will.
But some untrustworthy business lenders take this a step further by requiring fees before you even learn your options.
As a rule, you should never agree to pay fees until you’re fully satisfied with and willing to move forward on the business loan.
2. How Do I Calculate My Actual Interest Rate?
This is a question that comes up quite often with business owners who are seeking financing, and for good reason.
The interest rates that lenders present at the beginning aren’t always the same as the rates you end up paying when everything is said and done.
So how can you figure out what your actual interest rate is?
There’s a bit of confusion here because small business loans can either be based on an annual percentage rate (APR) or factor rate. These days, the majority of small business loans are based on a factor rate.
Most other personal loans (like mortgages and car loans) are based on APR. Small business owners are normally familiar with this structure.
Now, one isn’t necessarily better than the other, but the structure can affect your total payment amount. With either structure, the total payment amount should be your main focus.
When the interest rate is amortized over a long period of time, the total payback amount will increase—sometimes significantly.
To get a full glimpse of how to calculate your business loan interest rate based on APR, download our Small Business Loan Ripoff Report eBook!
3. Is There a Prepayment Penalty?
If you’ve never obtained financing for your business before, then this is something you might not even consider.
Often, business loans help companies to drive revenue faster than expected. Some business owners attempt to avoid rising interest rates by paying off the loan early. To keep their bottom lines even, many lenders charge prepayment penalties.
These prepayment penalties effectively ensure that the loan is still profitable, even if you make payments early.
Now, not all prepayment penalties are necessarily business loan ripoffs. But before signing the dotted line, this is something you should inquire about.
Some business lenders may offer a discount on the loan, without allowing you to avoid the penalty/fees altogether.
4. Requiring Collateral for a Business Loan
Collateral was once a necessity for business loans. But with new options available everywhere, business loans should be available without putting down collateral.
If a lender insists that you put down collateral, this should be a major red flag. Be sure to discuss this question when discussing the rates and terms for your deal.
If you have (and are willing) to put down collateral, then it might help you negotiate a better deal. However, lenders that insist you put down collateral to qualify, without providing other options, are looking to take advantage.
5. Believing the Bank (And SBA Loan) Hype
Banks have been around forever, and are notorious for having the lowest rates available. But it’s 2019, and you can get financing online in two days. Which way should you go?
If you can qualify for bank financing and get prime rate on a revolving line of credit, then you should probably take that. Unless it takes you hours, weeks, and months on end. Unfortunately, this usually ends up being the case.
In the end, it comes down to the question of whether you should spend a massive amount of time to save a little money.
Most business owners looking for a loan assume that an SBA loan is their best shot at the lowest overall cost. After all, longer terms equate to a better deal, right?
The short answer: only sometimes. In other cases, it’s pretty far from the truth.
In our full guide, we break down the numbers so that you can see when it makes sense to apply for an SBA loan, and when a term loan or line of credit might make more sense.
Download Your Free Business Loan Ripoff Guide
The more you know about the business financing process before you start, the better prepared you’ll be.
In addition to providing even more insight about these business loan ripoffs outlined above, we also delve into all of the other details you need to know, including:
- Are You Personally Guaranteeing the Loan?
- What Are Your Repayment Terms?
- Are Business Loans Based on Your Personal Credit? What Does Your Credit Score Need to Be?
- What Fees Are You Being Charged?
- Do You Need to Show a Profit on Your Tax Return to Qualify for a Loan?
Additionally, we also outline everything your business lender and broker doesn’t want you to know, like:
- Taking Out a Short-Term Business Loan Won’t Build Your Credit/History and Guarantee You an SBA Loan
- Your Broker Is Also Charging You a Fee
- There May Be a Confession of Judgement On Your Loan
- You Can Have More Than One Small Business Loan At a Time
- Direct Lenders Offer Only Limited Options
Ready to get started? Snag your free copy right away!