Getting a Business Loan is not an easy task. The process can often get emotional, and it’s easy to get confused and not really understand what you are agreeing to. I am guilty too – one time I leased a car and thought I had agreed to a three year lease, but it was really two years.
There are five questions you should have clear answers to before signing on the dotted line.
1. What will all of my up-front fees be?
2. What will my annual cost of capital be with all fees included?
3. How can the rates change during the term of the loan?
4. What collateral will the lender be taking and with what conditions?
5. If I choose to get out of the loan early, what penalties will I face?
It is absolutely critical that you understand all of these issues clearly before you sign on the bottom line. At MultiFunding, we constantly meet small business owners who are entrenched in loans that they don’t understand. Many times they have given away far too much collateral for the loan they got, and get caught with VERY sneaky pre-payment penalties that put them in handcuffs.
It’s natural to FOCUS on getting the best possible rate that you can get. But sometimes, it’s well worth it to pay a little more in order to have the flexibility to borrow more money in the future (not use up all your collateral) or to trade another dimension for a better pre-payment penalty.
Loans should always be designed to give the borrower the most FLEXIBILITY as possible. Always push your lender or your advisor to try to come up with two very different options for you. The choice and the differences between the two of them will help make sure you are focused on all five issues.