6 Things to Look Out for When Shopping for a Business Loan

06 Jul, 2017 / Comments: Comments Off on 6 Things to Look Out for When Shopping for a Business Loan / By

In order to make money you need to spend money. Not all business owners have the money needed to get started and it’s not always that easy to secure the necessary finances. New business owners and current business owners alike can be faced with the frightening task of finding the money needed to grow and succeed. Not all business loans are created equal. Here are 6 things you should be on the lookout for when you are shopping for a business loan.


Not Disclosing APR

All loans have an interest rate attached to them. Higher interest rates will mean that you pay back more by the end of the loan. Online lenders typically have higher interest rates than traditional banks, but they are often easier to secure. Different lenders offer different rates. Your rate can also vary based on factors like your credit score. Check out a few different options and compare the interest rates. Be wary of lenders who don’t disclose their interest rates. Online lenders are more prone to giving you the total cost of the loan without the APR.

You should also never sign an agreement without getting the effective APR. This is the annual cost of your loan with fees and compound interest taken into consideration. This will let you know exactly what you are getting as well as gives you the ability to comparison shop.


Fees Attached to the Loan

Many loans come with fees attached to them and business loans are no different. You need to pay close attention these fees because they are often not usually stated up front. They tend to hide out in the fine print. You can quickly find yourself with payments much higher than you originally thought because a few extra fees have been attached on.

One common fee is the origination fee. This is taken out of the loan before you even receive it. Transaction fees are often charged every time you make a withdrawal from a line of credit. You can be charged inactivity fees if you don’t use your loan within a specific timeframe. You may also be faced with fees charged by the government on SBA loans.


Prepayment Penalties

You might think that paying your loan off earlier is better. The opposite is actually true. You can be faced with prepayment penalties for some loans if you pay the loan off too soon. The penalties are usually calculated by multiplying your outstanding balance by anywhere from 1 to 3%. You may be charged a higher percentage the earlier you pay off the loan. These penalties can significantly increase the cost of your overall financing. Make sure you find out what the prepayment penalties are of each institution you investigate.


Terms of the Loan

Watch out for specific terms of the loan. This can have to do with repayment or what the money can be used for. Some loans have a repayment period of 6 months to 2 years. Others may have a longer repayment period of up to 5 years. It is important to pay close attention to the length of time you have to pay back the loan.

You also need to make sure you know the specifics of how the loan can be used. Some loans may have no restrictions. Many SBA loans can only be used to gain capital to acquire a new business or for working capital to renovate and expand. It cannot be used to refinance existing debt or repay delinquent taxes. Make sure you know the terms of the loan and that you are getting the right type for your needs.


The Privacy Policy

Privacy policies can be tricky. Many people sign without reading the entire document. It is essential that you not skip this step. Some institutions claim the right in the privacy policy to sell your information if you are denied a loan. They then make a decent commission off of the sale.



Pay careful attention to what lenders try to offer you. Some may attempt to woo you with promises of cashback and “payment holidays.” Loans with a cashback option tend to be more expensive than those without. You lose the incentive if you pay the loan off early. Payment holidays are essentially breaks where you don’t have to make a payment for a month or two. Interest still accrues even though you skip the payment and you still wind up paying more at the end of your loan’s life.

Shopping for a business loan can be an overwhelming process. You know what you need. The knowledge of what to look out for is just as important. These two factors can help you to secure a good business loan that helps you to increase your profits and become the success you’ve dreamed of being.



William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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