Best Ways to Avoid Hidden Fees in Business Debt Consolidation

Lenders who dodge your questions about pricing. Who gloss over contract details. Who talk you into a bigger, pricier loan than you need. Sound familiar?

If you’ve owned a business for even a brief period of time, chances are good that you’ve encountered at least one lender who cared more about looking out for his own interests than yours. And it’s far more common than you think.

Small businesses in the U.S. number around 28 million. They create 2 out of every 3 net new jobs in the country, and employ about 50% of the country’s private workforce - about 120 million people. They deserve clear, efficient access to capital - and they deserve to know the true cost of their loans.

The good news is, the resources you need to avoid a bad lender are readily available - if you use some simple methods. Here are five tips to get a better deal on your next loan and keep from overpaying for it.

The Total Cost of a Loan

You are absolutely entitled to know the total cost of a loan before you sign up for it. That means application fees, annual fees, service fees, origination fees - all of it. That’s the only way you’ll be able to compare two offers.

Loan pricing has been confusing, or misleading, for a long time. Some lenders use rates that are calculated differently than a true interest rate so the loan appears cheaper than it is.

APR, or annual percentage rate, is the closest thing lenders have to a fair yardstick. It lumps all of the costs over the course of a year into a single equivalent interest rate. Unlike the interest rate, the APR incorporates most fees and accounts for payment frequency, as well. It’s one of the best ways to line two loans up side by side.

Many merchant cash advance lenders may tell you that APR doesn’t really apply to their product because they don’t offer business term loans. That’s simply untrue. They can calculate APR - and they can tell you the cost of the loan.

To be fair, a high-APR loan doesn’t always mean you’re being ripped off. Sometimes a high-APR product can be the right kind of product for your business and how you use it. But the lender has to explain that to you clearly and plainly - and help you know for sure.

Some lenders have set the repayment amount at a fixed level so that paying early doesn’t save you a dime. So ask what amount you would owe as of today, tomorrow, whenever you like - and if that number is more than the outstanding principal, it’s a penalty, even if they don’t call it one.

If you take out a new loan before paying off the old one, double-check your bill. The lender should only be charging you for the new loan, not running fresh charges on the balance you already owed from the last one. This is one risk if you take a new loan from the same lender.

Here’s an example. Say you still owe $10,000 on your last loan and you take out a $25,000 one. The lender uses $10,000 to repay the old balance and you only get $15,000 in new capital. But if the fees are figured on the entire $25,000, you’re paying a second time on $10,000 that you still owed.

Stacking

Then there’s stacking. That means taking out a loan or advance from someone else, on top of the credit you already have. Each cash advance takes a slice of your sales. Four or five can start squeezing cash flow like a python around the business.

Maybe you need funds for a wonderful opportunity you couldn’t have guessed, or maybe you’re facing a tight situation that just can’t wait. Either way, needing the funds doesn’t mean taking on an additional credit product.

Refinancing can lower costs, in the long run, compared with the quick jolt of a new loan.

There are two ways to re-fi. You can lengthen the term to lessen the monthly drag of principal and interest, a long-run move that usually works but likely means a higher rate. Or you can take out a loan at a lower rate. Tough to do, you have to check things out, but a possibility worth it only if the origination and other fees you pay are lower than the interest you save.

Before you take out any debt, sit down with your trusted accountant or financial adviser and hash out exactly how much you need. And steer clear of anyone who tries to rush you or upsell you a larger loan. It can be tempting, but you’re better off getting the loan that fits. Having cash can be a good thing. But having cash you don’t need in the form of a high-rate advance is not.