Best Ways to Evaluate Business Debt Consolidation Fees

Some lenders hide what a loan costs, skim over the terms, and then push a bigger or pricier deal than you need. Wouldn’t you call this terrible treatment?

Look, almost all of you have sat down with a banker who gave advice only if the advice paid off for the bank. I’m sure you’ve all run into lenders who show you the fancy parts of a deal but never explain everything you need to know.

Small businesses - like yours - keep our whole economy growing. We owe respect to our small businesses. Two of every three net new jobs and half of our private-sector workers come from the 28 million small businesses we have around the country. They deserve clear and fair access to credit.

You want to find low-cost financing you can depend on, but there are some lenders who won’t treat you fairly. Five simple steps can keep you from getting ripped off, ensure that you can spend your time and money well, and help you make sure your lender gives you credit you can trust.

The True Cost of Any Loan

You should always know the true cost of any loan you’re offered. You deserve to know how much you will pay for a loan in total and which loan is right for you. App fees, annual fees, service charges, origination fees and other fees add to the total cost of your loan. You can only compare lenders’ offers once you know the true total cost of each loan you’ve been offered.

You don’t see too many lenders being clear about loan pricing. Some lenders don’t show you what you’ll actually pay. Others quote rates that don’t add up like you’d expect them to because they’re not using a standard method. It makes the deal sound more attractive than it actually is.

That’s where APR comes in. It’s short for “annual percentage rate.” The APR is the true cost of financing expressed as an interest rate that accounts for all fees charged over time. Interest rate alone is only part of the equation. APR takes into account things like any fees the lender charges and how frequently you’ll make payments. It boils down the cost of the financing you’ve chosen to one comparable figure. If you’re spending some time on a few different financing options, APR is an easy way to compare deals like-for-like.

Many small business owners ask merchant cash advance lenders about their APR, only to be told “APR can’t be calculated since these are not loans”. This is flat-out false. Any lender can calculate APR, and any borrower can ask for it to see the full picture of a deal.

It may seem like higher APR means you’ll pay more, but the fact is: for some businesses, higher-cost capital can be the right choice for your business’s needs. What you want is a lender who openly explains why his products fit your business.

Any respectable lender would be happy to help you work out the annual percentage rate so you can go down the street and see how your options stack up side-by-side.

Also watch for lending contracts that fix the repayment amount so that paying early saves you nothing. Terms in the loan agreement or repayment letter aren’t always clear. Ask what the payoff amount will be on a specific date. The amount should not be more than the principal remaining at that date. If it is, you’ve found a prepayment penalty.

It doesn’t make sense for you to pay fixed charges on the same money twice. If you get a new loan before your first is paid off, make sure the lender only charges you for the new money you actually get. If you’re keeping the balance from the first loan, you shouldn’t be charged for it a second time in the new loan.

Say you owe $10,000 on one loan and apply for a $25,000 loan to pay it off. Only $15,000 of the new loan is actually “new money.” If fees are charged on the full $25,000, you’re charged twice for that $10,000.

A related risk is stacking, which is when a small business gets a cash advance from another lender while there’s still one open from the first.

When you have to pay off more than one cash advance every week, month or year, you may find it getting hard to meet all of your spending commitments. Each time you stack the deck, that new lender takes its cut of your total receipts — squeezing cash flow just like a boa constrictor squeezes the life out of a rat.

New Credit Product May Not Be the Best Move

If you’re facing financial trouble, or if you get a special chance to expand your business, a new credit product may not be the best move.

First you should think about refinancing your outstanding debt at a lower cost. If the refinancing will lower the total cost of borrowing, this could be a wiser choice than borrowing new cash to take a quick step forward.

There are two ways to refinance a loan or cash advance. One is to extend the term, which will lower monthly principal and interest payments but will likely raise the rate, though it can make sense as a long-run move. Lowering your monthly expenses can give breathing room to focus on your business — if you know you won’t get in financial trouble down the road. The second is to refinance to a lower rate. This is trickier, since it’s only worth it if the origination fee and other charges are less than the interest you will save over the life of the loan.

Know what your business needs from your accountant or advisor before you start looking for credit. Spending beyond your actual need can be tempting, especially when a lender wants to upsell. Rushed offers can make you feel pressured into taking a bigger deal than you need. Make sure the financing deal is sized to your goals, not padded for the lender’s benefit.