How can I avoid overpaying for a small business loan?

The loan officer who goes vague when you ask what their loan costs. The paperwork they rush past you at closing. The agent who pushes you to take out the largest, most expensive loan you can.

You probably know what it’s like when a lender isn’t acting in your best interest.

Yours is one of 28 million small businesses, and they create 2 out of every 3 net new jobs. They employ about half of private sector workers in the US - about 120 million people. They deserve a loan without hidden costs and jargon so they know what they’ll be paying in advance.

Finding a loan is easy; finding the cheapest loan is trickier. Just a few simple guidelines can keep you from paying too much for a financing deal. What follows are five tricks to avoid shoddy lenders who want to slip your business into overpriced loans and lines of credit.

The Full Cost

Knowing the full cost of a loan allows you to compare several offers and be sure you’re choosing the best one. You have a right to all the details, from application and annual fees to service and origination charges - before you sign the loan.

For decades the full price of a loan wasn’t always obvious. It’s especially tough to tell the full cost when you don’t know what fees lenders may charge, how they’re factored into your loan, or even if they factor at all. Some lenders quote rates unlike a true interest rate so products look cheaper.

That’s where the APR comes in. APR stands for Annual Percentage Rate. The APR means just what it sounds like: it takes all of a year’s costs and boils them down to one equivalent interest rate. Some lenders just quote an interest rate, but an interest rate isn’t enough. The APR is better because it includes both interest and fees. And it includes how often you make payments. For an exact apples-to-apples comparison of loans you must look at the APR, not the interest rate alone.

Believe it or not, many merchant cash advance lenders say they can’t calculate an APR since they don’t do term loans. That’s not true. If you borrow money, the APR can be calculated.

None of this means a high-APR loan product is always bad; for some businesses, high-APR loans fit the business. But a lender must clearly explain to you why the product costs what it does, and the lender should do so before you sign.

A good lender will show you how to calculate the APR so you know exactly what you’re paying.

Also ask about repaying early. Some lenders set a fixed repayment amount, so it doesn’t matter if you repay early or not - either way you’re on the hook for the same amount. Ask how much you’d pay if you repaid as of a specific future date. If you’d still owe more than the outstanding loan principal, that’s a prepayment penalty. It’s not always disclosed.

Watch out when you re-up before the old loan is repaid. Some lenders may charge you fees twice, when the new fees should cover only the new capital. It’s natural to want to stick with the same lender who gave you your first loan, but because of this you need to read over the new paperwork carefully.

Say you owe $10,000 on an old loan, then you decide to take $25,000 from your existing lender. Only $15,000 of that $25,000 loan is new money, but if they factor their fees on the full $25,000, that’s double-billing you for the $10,000.

Stacking Can Choke Off Your Working Capital

Stacking means taking a cash advance or loan on top of a separate credit product you already have from another lender.

One cash advance draws from your cash flow; several can seriously choke it. Each takes a percentage of your sales. Stacking can choke off your working capital the way a boa constrictor squeezes an animal.

Whether you’re in a tough spot or see an opportunity you don’t want to let slip away, don’t open new loans simply because your lender offers it.

The Least Expensive Option

Before you choose a new loan product, check if you can refinance. You want to find the least expensive option, not just the cheapest offer from a new lender.

There are two main ways to go about it. You might be able to lower your payment by lengthening the term, though the rate will likely go up. This strategy might suit your long-term goals. Or you can change to a lower-rate product. That’s trickier: it’s only worth it if savings over the life of the loan or advance are more than the fees, like origination charges.

Before you accept that financing deal, ask someone you trust, like an advisor or accountant, how much you actually need. Avoid lenders who pile on extra capital, or who tell you the offer will run out if you don’t act. It’s tempting to borrow more than you need when they’re offering it, but resist. The goal is to be well financed, not over financed.