When a small business owner is asked why he or she has not looked into small business loans, a common response is “I don’t have the time.” At first, this seems to imply that the business leader is lazy or just uninformed about the modern business financing industry. “Who doesn’t have the time to fill out a quick application and gather a small pile of paperwork?” you might think. Well, it’s not the application itself that the business leader doesn’t have time for. It’s the undeniably stressful process of comparing costs and looking out for hidden traps. An unfortunate reality of this process is that it is indeed very easy to be tempted or manipulated into taking out the wrong business loan for your needs. That’s why it is widely recommended to know what kind of criteria should have the biggest impact on your decision.
Your chances of making the wrong move are much lower when you can tell whether or not a small business loan option is too good to be true. Here are four things to be wary of when shopping for small business loans:
1. Reserve Bids
Ever heard of this? You should ask potential business lenders about reserve bids while discussing how the business loan is paid back. A reserve bid is a contractual term that is most frequently added to business loans in which payments are directly tied to sales. Instead of the typical monthly payments of a business term loan, your payments are a percentage (usually fixed) of your daily, weekly, or monthly sales. With a reserve bid, a slow period allows the business lender to take a larger percentage of your sales to compensate for the increased “risk” you have put on the business lender. If this sounds ridiculous, it’s because it is. The whole point of tying payments to sales is to pay less when sales are down. Reserve bids should therefore be avoided in most cases.
2. UCC Filings
You’ve probably never heard of this either, and that’s just fine. Business leaders are more than familiar with tasks or regulations that make their lives unnecessarily complicated, and a UCC filing is yet another one of them. You only have to worry about a UCC filing if you plan on taking out a secured business loan, or a business loan that requires collateral. A UCC filing is merely the official documentation which sates that until the debt is paid off, the business lender technically owns the asset has been put up as collateral (real estate, equipment, etc).
Why is this so annoying? For some reason, all UCC filings last five years, even if the term of the business loan is less or more than five years. Let’s say the term on your loan is three years and you pay it off without trouble. Since the UCC filing is still intact, you have to contact the business lender and literally ask them to terminate the filing. You’d think the business lender would do this automatically after seeing that you paid off the loan. But nope, this is yet another thing you have to remember to do at the end of the repayment process. If you don’t contact the business lender and try to take out another secured business loan shortly after, you might be denied because the second business lender would see that the UCC filing is still intact.
3. Prepayment Penalties
When a business loan is paid off in full earlier than the previously established date, the business lender may lose money it would have made from interest. Prepayment fees offset these losses and can significantly increase the loan’s overall cost. Plenty of business lenders, however, have no issue with borrowers paying off a loan early to save money. So, even if you don’t think you’ll be able to pay off the loan early, you should ask potential business lenders about any additional fees or charges associated with prepayment.
4. Credit Reporting
Many borrowers have made the mistake of assuming that all reputable business lenders report business loan payments to major credit bureaus for every type of financing. But some business lenders do not report this information for any of their products. Others only report to major credit bureaus for certain products they offer. You should not assume that because one business lender does not report repayment information for a specific product, the same thing applies to another business lender offering the same product, and vice versa. Paying off a loan in which your payments are reported to credit bureaus can be extremely advantageous, simply due to the countless things that are easier to obtain with a strong credit profile. Potential business lenders should therefore be asked about credit reporting before agreeing on a loan.
Hidden traps like these are a big reason alternative business financing is becoming more popular. They might not offer the same interest rates as banks but there is a stronger sense of transparency and the application and repayment processes require much less effort on behalf of the borrower. So, if you want less things to be wary of (or you don’t have the time to watch out for them), when shopping for business loans, look into companies like United Capital Source and leave unnecessary stressors behind.