Why It Pays to Take a Hard Look at the Math Before Applying for a Loan

If you’re a business owner in need of a loan, it’s understandable to want to accept any loan offer that comes your way. Also, if you have low credit or no credit, finding a lender that will take a chance on you might render you so grateful that you barely look at the fine print before signing on the dotted line. But, by not giving yourself a moment to sit down and crunch the numbers, you’re putting your business at risk of going under. It sounds dramatic, but this kind of situation happens all the time. Avoid unfortunate surprises by sitting down with the loan offer and your current financials to calculate those essential numbers. You may find out that the loan you’re offered is too good to be true.

Various Hidden Fees

There’s a catch with hidden fees: they aren’t always hidden. But they aren’t exactly clear either. Watch out for confusing or vague language surrounding your fee structure. Fees that involve tiers or points may be used to confuse you, as is the case with loan scams. Other costs associated with private loans often include:

  • Underwriting fee
  • Origination fee
  • Closing fee
  • Miscellaneous or filing fees

These upfront costs may not seem like much, but depending on the lender, they can range from $200 to $2000. These high fees will quickly turn a seemingly great deal into an unaffordable one. Before calculating anything, check your lending agreement for these various fees. If they’re not there, make sure they’re not hidden on a separate payment schedule or in the correspondence between you and the lending company.

The Formula for Calculating The Real Cost of a Loan

Many irreputable lenders offer low-interest rates and manageable repayment terms and rely on these fees to heavily inflate their client’s repayment. However, determining the real cost of any loan is an easy formula to follow. Here’s a sample breakdown of the true affordability of a loan, courtesy of Company Capital:

For a $10,000 loan, subtract the underwriting fee and the origination fee (in the provided example, the amounts are $300 and $1000). That leaves the lender with $8,700. The amount sold to the lender is $14,100 (this includes the interest rate). To find out the actual cost of the loan, subtract the amount received from the total repayment amount ($14,100 – $8,700). The cost of this $10,000 loan is $5,400. Factoring the underwriting and origination fees, the lender is paying back 62% of the original loan. When you include the repayment schedule, which in this case, is 100 days, the lender’s annual rate jumps to 165%.

The Real Numbers

Applying simple math to the example above illustrates how important it is to be vigilant and to do the math when applying for small business loans. At Greenbox Capital, our loans are designed to help small business owners succeed. All our lending options are transparent and fair. To gain access to working capital, fill out an application form today!