While filling out a small business loan application, you may notice unfamiliar terms on your contract. If you want to make your small business successful, you should know exactly what you’re signing.
It’s highly important to understand all the information mentioned in the fine print, so that’s why we’ll walk you through all the important small business loan application terms.
Pay special attention to these terms before signing your unsecured business loan application form.
Lenders and financial institutions often charge an application fee to cover expenses connected with processing loan requests. It’s extremely important to check all the information because every small detail can be significant. The cost of the application fee can be expressed as a one-time payment (for example, $100) or as a percentage of a loan. As for the good news, such fees are negotiable and you can always discuss them with financial institution you have chosen.
In most occasions you should pay the fee only once the deal is approved.
Most online lenders charge an origination fee. It can be that an original fee on the first loan is higher than the one charged on the second loan. Keep in mind that the lender charging the lowest origination fee isn’t always offering you the best deal. The best way to get to know how much your loan really cost is to ask the APR (annual percentage rate).
Variable Interest Rate
Variable interest rate is called so because it can be changed during the repayment period. Due to market fluctuations, it can fall down or go up.
Usually business loans have fixed interest rates and strict repayment period. As for credit cards and lines of credits intended for business owners, mostly they have variable interest rates because there no specific terms for the full balance should be repaid.
Fixed Interest Rate
Fortunately, today interest rates are record low, so it’s better to focus your attention on getting a loan with the fixed interest rate. It means that the interest rate you pay stays the same within the whole repayment period.
For example, if you have a 15-year home loan with the fixed interest rate, then within all these 15 years you pay the same interest rate and the size of monthly payments also stays the same.
Penalty for the Prepayment
One of the most popular mistakes startups make is thinking that paying off a business loan earlier is always a wise step and that it always helps to save money on paying the interest. Be careful and read the fine print because some lenders may charge prepayment penalty so paying off your loan earlier will cost you money!
If there’s a chance that you will refinance your loan later then getting one with a prepayment penalty isn’t your option.
Price of Missed/Late Loan Payments
In other words, it’s called “default interest rate”. It’s an interest rate the lender charges in case you fail to pay the loan or make late monthly payments. It’s usual for credit cards: When you fail to make a payment on time or exceed your limit, you can face a higher penalty rate.
Term of a Contract
It’s an important factor you have pay attention to. Financial experts recommend avoiding loans coming together contract duration. In case you’ll decide to break the contract and leave your lenders before it ends, they can charge quite high penalty for it.
Taking out a business loan is an important step, so consider all these factors before taking out one. Read the fine print carefully to avoid unpleasant surprises and evaluate all the pros and cons before making a final decision.