A small business loan is a great way to finance the early growth or expansion of a small business. These loans typically have short terms and can serve as quick, high-impact infusions of capital to take a company to the next level.
However, just because you’re offered a loan doesn’t mean that you should agree to the terms. Not all business loans are beneficial for a small business. Sometimes the best thing you can do is run away. Other times, you can even turn the tables with a counter offer that makes the loan more beneficial, regardless of how crazy it may sounds to your lender.
Here are ten reasons to run away from a loan offer:
1. Your Lender Insists On A Hard Credit Check
Hard credit checks can hurt your credit score – especially if you have several bunched together in a short time span that don’t come from home, auto, or student loan lenders. Many lenders require hard credit checks, but if your credit isn’t excellent, you may want to avoid hard credit checks until you’re more certain of approval.
Some lenders are more understanding about the adverse effects of hard credit checks than others, and may be willing to use a soft credit check to assess your likelihood of approval. They may still need a hard credit check before issuing the loan, but if they want a hard credit check as an early part of your application, you may want to hold off.
2. A Personal Guarantee is Required
Some business loans require personal guarantees, but not all. If your lender insists on a personal guarantee – even if your loan is properly collateralized – it may be worth checking out other alternatives. This is especially true if you have a young or risky business. If your business fails, you don’t want to be stuck personally paying back a bad loan. You may need to find an investor instead of getting a loan.
3. The Lender Requires Extra Co-Signers
If your collateral and credit aren’t adequate to qualify for a loan without a co-signer (except for a partner in your business who’s also taking the risk), you should definitely rethink taking a loan offer. Saddling your friends or family members, who were doing you a favor by co-signing your loan, with unnecessary debt has the potential to ruin relationships that should be more important than your business financing.
4. High Origination Fees
Lenders have to make money, but sometimes the origination fees they charge can be outrageous. If your lender is charging more than 1% – 3% origination fees, you should think seriously about finding a different lender.
Some lenders try to mask these fees by adding them onto the balance of a loan, rather than having them paid in cash at closing. Make sure that you read the fine print for any loan offer to understand all of the fees as well as how and when they’re to be paid.
5. Prepayment Penalties
If you take out a business loan, you shouldn’t be penalized for being able to repay a loan faster than anticipated. Being able to pay back a loan early should be a mark of success that opens up additional growth opportunities. Your lender should want you to pay back your loan quickly so you can use them again to fund your next project. They shouldn’t be penalizing you for being successful.
Prepayment fees have long been an issue, especially for business loans and alternative lenders. However, many lenders have had to abandon these fees in recent years to remain competitive in the lending marketplace, but there are still some lenders who charge them.
6. Rate is Higher Than Industry Averages
When you’re reviewing a loan offer, make sure you’re aware of competitive rates in the marketplace. SBA loans are the most popular types of small business loans, so a good place to start is with SBA loan rates. This will help you know about what you should be paying at any given time. Paying more than the industry average typically means you might be able to find a more affordable loan with a different lender.
7. Your Rate is Variable Instead of Fixed
Lenders often make variable-rate loans look very attractive because they typically start out slightly lower than fixed APR. However, in reality variable rate loans are much riskier than fixed rate. No one knows what interest rates will do over the course of your loan term, and the cost of a variable rate loan can potentially grow tremendously over time. You want to make sure you can budget your exact payment every month.
8. Loan Term is Too Long or Too Short
If you’re going to accept a business loan offer, make sure that the loan will actually be beneficial for your business. This means finding a loan that has the right term. If a loan term is too short, you may have to strain to pay it back on time and the loan could end up hurting your business. At the same time, if the loan term is too long and comes with prepayment penalties, you may hurt your ability to finance additional expansion later on.
9. Payment Schedule Doesn’t Match Your Cash Flow
Some loan providers insist on having weekly payments automatically deducted from your business checking account. Having four payments each month instead of just one may not seem like a big deal, but if you’re in a business that has fluctuations in cash flow, you may be forced into a position where you can’t make a scheduled payment one week.
Defaulting on a business loan can trigger all kinds of penalties and other fees that you should make every effort to avoid. Finding a provider with a payment schedule that matches your business cash flow is a great way to do that.
10. Excessive Collateral Requirements
Most lenders – whether issuing business or personal loans – want to make sure that their loans are properly collateralized. Some lenders, however, can get carried away. You wouldn’t want to take a business loan that put you at risk of losing your home, for example.
You may also want to avoid loans that require UCC liens so a lender can establish a right of claim on your business assets. If you end up missing a payment or have other problems with your lender, these liens can be a nightmare to clean up later on.
3 Crazy Counter Offers
Sometimes the lender just needs a little push in the right direction in order for you to make a deal that will work for you. Other times lenders hold back their best offers, which they’ve likely already been approved for in underwriting, because they expect you to make a counter offer.
Here are three crazy business loan counter offers, that you may not think you can ask for, include:
1. Ask a Lender to Cut the Origination Fee
Though it may seem counterintuitive, sometimes there’s actually room for haggling with a loan offer. This is especially true for origination fees. Quite often, this is where lenders have the most room for negotiation. Lenders typically won’t eliminate origination fees, but a lot of times they’ll reduce the fee if you make it a condition of closing.
2. Offer a Personal Guarantee or a Co-Signer to Reduce Your Rate
This is a truly crazy counter offer because making personal guarantees or involving co-signers are almost always things that you want to avoid. However, if you’ve gotten a loan offer and you don’t like the rate or terms, a personal guarantee and/or co-signer can be a great way to negotiate a better offer, bringing it line with your needs.
You still don’t want to unnecessarily expose friends or family to risk of your default, but if you or a business partner have excellent credit and are willing to sign a personal guarantee to make your business loan more attractive, these can be great tools in countering a loan offer.
3. Accept a Higher Rate for an Unsecured Loan
If lender wants too much collateral, you might try nixing the collateral and taking a higher rate. This way you may be able to avoid any personal guarantees. You’ll likely have a higher interest rate, but this can be a good step if you have assets to protect or are taking a loan for a very risky business.
Getting an offer for a business loan can be a great step toward getting financing critical to your business. However, an initial loan offer isn’t always your best option. Sometimes, the best thing for you to do is run away from a loan offer, while other times you can turn a mediocre loan offer into a great opportunity with the right counter offer.