So you’re applying for a small-business loan and you have a huge stack of business loan documents to review before signing. And your day is already full — after all, small business owners are busy people.
Yet important information about the terms of your business loan may be deep in the small-business loan application and agreement. You may even find details that make you think twice about whether you want this particular loan.
Wondering what kind of information to watch for? Here are some commonly overlooked details when reviewing loan documents from both traditional banks and alternative lending sources.
Interest rate adjustments — floating or fixed
While the interest rate for your loan most likely caught your attention right away, you may have missed a variety of restrictions and explanations that go along with it. Look for the interest rate information in your agreement and make sure you understand each and every detail.
First, is the rate fixed or floating, and if it floats, when will it change? Also, how often is the rate compounded? All these features affect your payments as well as the real cost of your business loan.
While some lenders set out payment schedules in a completely separate document (similar to payment schedules for mortgages), others put the key points of your loan payments into the text of your loan agreement. Look for any mention of the following:
Your fixed loan payment amount
How much of each payment goes to principal (amount you borrowed) and how much to interest
When payments are due: weekly, biweekly, monthly
How payments are to be made: direct withdrawal from your bank account or by check
The lender definition of default
While most borrowers and lenders will agree that “default” basically means not making payments as agreed to, your lender may have a specific definition that could be found in your agreement. Does default mean being one week late with a payment, or one day late? Does the definition change if you notify the lender prior to defaulting and request an extension? Learn what your lender deems a loan default so you can avoid it.
Study your business loan agreement carefully for fees, including origination fees. An origination fee is what the lender (or government, in the case of SBA loans) charges for processing a new loan application.
Origination fees may appear as a flat fee or as a percentage of the total loan amount requested. Look for any text about rolling your origination fee into your total loan amount because this means you pay interest on that fee as well as the money you are borrowing. And this affects your APR, the actual rate you’re paying to borrow money.
Late payment fees and grace periods
Lenders charge a late payment fee if borrowers miss making a payment. Yet sometimes life happens and payments don’t get made on time, so review the agreement to see if your lender also offers a grace period. And look for any mention of reporting to a credit bureau, as reported late payments may affect your credit score.
Are you planning (or maybe just hoping) to pay your loan off early? If so, pay particular attention to language in your business loan documents that refers to prepayment fees. Lenders may charge these fees if you try to pay your loan off early. The fees may compensate the lender for some of the interest it won’t collect from you because of the early payoff.
Prepayment fees vary greatly between lenders and even loans. They may occur as a flat fee, or as a percentage of your original or outstanding loan amount that decreases the longer you have the loan. If you think you may have the cash to pay your business loan off early, make sure you understand your loan’s prepayment features.
I know you’re busy. But do yourself (and your business) a favor. Don’t skip reading all the language in your small-business loan before you sign the loan application and loan agreement. And if you don’t understand the terminology (loan document language often seems complicated, lengthy, and unclear), ask your loan officer to explain it in everyday language.
If you don’t read and understand the agreement, you could find that you’re committed to a loan with obligations you don’t want.
Sarita writes about money, credit, mortgages, retirement, budgeting, small business, and entrepreneurship for American and Canadian audiences. She is a former financial adviser.
About Square Capital
Getting a small-business loan can be a complicated process — but it doesn’t have to be. With Square Capital*, there’s no lengthy application, qualified sellers can get funds as soon as the next business day upon approval, repayment happens as a fixed percentage of your daily card sales, and the cost of the loan is a fixed dollar amount that never changes. We want to make getting access to the funds you need to grow your business as simple and easy as possible.
Square Capital, LLC and Square Financial Services, Inc. are both wholly owned subsidiaries of Square, Inc. Square Capital, LLC d/b/a Square Capital of California, LLC in FL, GA, MT, and NY. All loans are issued by either Celtic Bank or Square Financial Services, Inc. Square Financial Services, Inc. and Celtic Bank are both Utah-Chartered Industrial Banks. Members FDIC, located in Salt Lake City, UT. The bank issuing your loan will be identified in your loan agreement. The individual authorized to act on behalf of the business must be a U.S. citizen or permanent resident and at least 18 years old. Loan eligibility is not guaranteed. All loans are subject to approval.