5 Ways to Avoid Paying Too Much on a Business Loan

There are some simple tricks you can use to weed out the bad apples and ensure you get a fair deal on your financing.

learn more about Sam Hodges

By Sam Hodges


Opinions expressed by Entrepreneur contributors are their own.

Coy about costs. Brushing over the fine print. Pressuring you into something bigger or more expensive than what you need. If you're an entrepreneur, chances are you've had at least one uncomfortable encounter with a lender who just didn't seem to have your best interests at heart.

Earlier in my career, my partners and I built up a network of successful fitness businesses. The business grew quickly, and we started shopping for a loan to help us expand our profitable model to new markets. It was during this time that I got my first glimpse into the opaque underbelly of the traditional lending industry. We were shocked at how many lenders literally could not produce an amortization and repayment schedule. And when we asked them to share their fee structure and APRs? Crickets.

Related: Will 'Being Wasted' on Facebook Hurt Your Small-Business Loan Chances?

There are 28 million small businesses in the U.S. These entrepreneurs create two out of every three net new jobs and employ half of the private sector workforce (about 120 million people!). They deserve better. They deserve an efficient and transparent way to fulfill their growing capital needs, and they deserve to understand the true cost of their loans.

The good news is that there are some simple tricks you can use to weed out the bad apples and ensure you get a fair deal on your financing. If you're looking for an injection of cash to jump-start your business, here five ways to avoid overpaying for a loan:

1. If they can't tell you the APR, walk away.

Application fees, annual costs, service charges, origination fees -- you have the right to know the total cost of any loan you are offered so you can easily compare it to other offers and make the right decision for your business.

Unfortunately, financing has traditionally been sold with pricing that can be confusing or misleading -- and the true cost of a loan is often not disclosed. Instead, some lenders quote "rates" that are calculated a little differently from a true interest rate, so their products appear cheaper.

One of the best ways to do an apples-to-apples comparison on loan products is to calculate the APR (annual percentage rate), a figure that tells you all the costs for one year in a single equivalent interest rate. It's the true cost of your loan because, unlike an interest rate, an APR also takes into account additional fees and charges often hidden in the fine print, and also normalizes for how frequently you'll need to make payments.

Many merchant cash advance lenders claim they can't calculate an APR or that an APR is irrelevant because they're not offering term loans. That's fundamentally wrong. They may not like it, but they can definitely do it. There are some products with high APRs that make sense for certain businesses in some circumstances, but a lender should be able to make that case transparently and equip a borrower with the right information to make the right decision for his or her business. A good lender will always be willing to help you calculate an APR, so that you can accurately compare your options.

2. Don't accept prepayment penalties as par for the course.

Some credit products charge a fixed repayment amount, making it impossible for you to save money by paying early. This is not always transparently disclosed, so if in doubt ask the lender to explain how much you'd owe if you repaid early on a specific date. If it's greater than the principal outstanding, then there's a prepayment penalty. End of story.

Related: 6 Smart Reasons to Get a Business Loan

3. Watch out for double dipping.

If you take out a new loan before repaying an existing one with a lender, ensure you are not unfairly double charged for the outstanding portion of your loans. The new fixed charges should only be calculated based on the additional capital you have received.

For example, a business owner who still owes $10,000 on a loan may take out a second loan for $25,000. The $10,000 could be rolled into the new loan so he or she only receives $15,000 of new capital. However, if this individual is charged fees on the full $25,000 amount, he or she would have effectively been double charged on the outstanding $10,000 amount.

4. Don't stand for stacking.

Stacking occurs when a lender convinces you to add a loan or cash advance product on top of another credit product you already have from a different lender. In this situation, you could end up with multiple cash advances "stacked" on top of each other, each diverting a percentage of sales from reaching the business. This can quickly become a boa constrictor around your business's cash flow.

Whether you're in a tight spot or want to jump on an unexpected business opportunity, it's important to remember that just because you need another injection of capital, doesn't necessarily mean you need a whole new credit product. Instead, consider if refinancing your existing debt can potentially lower your overall costs compared with the temporary boost you would get from taking out a new loan or cash advance.

There are two ways you can do this: One option is to take your current term and stretch it out a little longer to lower your monthly principle and interest payments. This is likely to increase your rate, but could be a completely reasonable strategy for the long run. The second, trickier option is to find a credit product with a lower interest rate and refinance -- as long as the origination fee and any other charges on the new loan are less than the lifetime difference between the old and new interest rate payments.

5. Resist peer pressure.

Before you start shopping around for a loan, work with your accountant or financial advisor to figure out how much money you actually need to accomplish the goals you have for your business. Avoid lenders who attempt to upsell you on a much bigger loan than you need or who try to pressure you into accepting offers too quickly. Sometimes the lure of additional working capital can be tempting, but remember it's about finding the right sized financing for you.

To learn more about your rights to fair and transparent financing, check out the Small Business Borrowers' Bill of Rights.

Related: The Perils of Short-Term Business Loans

Sam Hodges

Co-Founder and U.S. Managing Director of Funding Circle

Sam Hodges is co-founder and U.S. managing director of San Francisco-based Funding Circle, which provides an online marketplace for small business lending. He is responsible for overseeing the overall strategic direction and day-to-day operation of the company in the United States.  

Related Topics

Editor's Pick

Everyone Wants to Get Close to Their Favorite Artist. Here's the Technology Making It a Reality — But Better.
The Highest-Paid, Highest-Profile People in Every Field Know This Communication Strategy
After Early Rejection From Publishers, This Author Self-Published Her Book and Sold More Than 500,000 Copies. Here's How She Did It.
Having Trouble Speaking Up in Meetings? Try This Strategy.
He Names Brands for Amazon, Meta and Forever 21, and Says This Is the Big Blank Space in the Naming Game
Business News

These Are the Most and Least Affordable Places to Retire in The U.S.

The Northeast and West Coast are the least affordable, while areas in the Mountain State region tend to be ideal for retirees on a budget.

Business Ideas

55 Small Business Ideas To Start Right Now

To start one of these home-based businesses, you don't need a lot of funding -- just energy, passion and the drive to succeed.

Business News

I Live on a Cruise Ship for Half of the Year. Look Inside My 336-Square-Foot Cabin with Wraparound Balcony.

I live on a cruise ship with my husband, who works on it, for six months out of the year. Life at "home" can be tight. Here's what it's really like living on a cruise ship.

Business Solutions

Master Coding for Less Than $2 a Course with This Jam-Packed Bundle

Make coding understandable with this beginner-friendly coding bundle, now just $19.99.

Starting a Business

Ask Marc | Free Business Advice Session with the Co-Founder of Netflix

Get free business advice during our next Ask Marc, live Q&A, on 3/28/23 at 3 p.m. EDT. You don't want to miss it—send in your questions now.

Health & Wellness

5 Essential Steps to Expand Your Vision and Start Living Your Dream Life

It's time to break free from your comfort zone and expand your vision. When you refuse to settle for a mediocre life, you can start building a life you love.