Wednesday, May 18, 2016

What to Do If You Loan Offer is More Expensive Than You Expected

The good news: you’ve been offered the business loan you applied for.

The bad news: the loan offer costs way more than you expected.

What should you do?

1. Shop around for alternatives

Don’t jump at the first loan offer you get—especially if it’s costlier than you’d hoped.

Instead, do your homework and look for more affordable options. In order to compare apples to apples, make sure you understand the APR (annual percentage rate) of each loan you’re considering. Not all lenders disclose their APRs upfront, but because this number rolls in additional fees and miscellaneous charges you might not ordinarily take into account, it’s the best way to do a direct comparison between loans.

But what to do if your lenders don’t offer information about APR?

Thankfully, you can actually figure it out yourself, either by asking your accountant or checking out an online APR calculator.

2. Investigate why your offer is so pricey

Once you know the reason, is there something you can do about it?

For example, if you have bad credit, perhaps you need to focus on repairing your personal credit before you take out a loan. Or if your business is fairly new and hasn’t yet established strong business credit, you might want to focus on improving your business credit or waiting to hit the 2-year mark before you can get a cheaper loan.

3. Figure out whether you can afford the loan

Sure, the loan offer is more expensive than you expected it to be—but is it still doable?

If this loan offer is the best you can qualify for, if you really need the money, and if you can pay it back, maybe it’s worth the cost.

Work with your accountant to carefully assess not only the cost of paying back the loan, but also the expected effect the loan will have on your business.

For example, if an expensive loan will let you launch a new product line that financial projections show will double your revenue, maybe you shouldn’t worry so much about the price tag of the loan.

4. Look into non-traditional lending

Depending on how expensive your loan offer is, you might want to investigate alternative financing options like credit card financing, invoice financing, or merchant cash advances.

Keep in mind, though, that alternative financing tends to be more expensive than traditional business loans. Your accountant can help you run the numbers and see which option is best for you.

5. Self-finance your business

If time is not of the essence—for example, if you’re seeking financing for a planned expansion or to start a new business, and you can wait on taking action—you could skip financing altogether and either save up or generate enough capital to accomplish your business goals without taking out a loan.

6. Ask about prepayment penalties

If your major concern is not big monthly payments but the high interest rate and the overall amount of interest you’ll be paying over the life of the loan, prepayment might save you money in the long run.

Of course, you’ll need to make sure that the loan doesn’t have a prepayment penalty, and you should also talk to your accountant about whether your cash flow can handle making a large prepayment.

(Read more about the prepayment penalty and how to decide whether prepayment is a good idea.)

7. Consult your accountant

In case you didn’t get the hint after reading this far, I’ll spell it out: always talk to your accountant about any sort of business financing you’re considering.

Your accountant can help you plan how to finance your goals, understand the likely effect that financing will have on your sales, and determine whether a specific loan offer is a smart move for your business—or simply a drain on your finances.

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