What the Business Lenders Don't Tell You.

This is one tough economy these days. There are more and more small businesses borrowing capital now than ever before. If it’s time for you to execute your plan of action and you just need some capital to make it happen then you stopped at the one blog that is going to give you a 17 years of experience crash course on what to look out for once you feel you have found the right business financing. If you are going to apply for a business loan then this article is for you.

I’m going to touch on the little things such as refinancing, prepayment penalties, file behind loans and closing costs. Interest is the easy part. Your broker is going to hate me for this but it’s my way of giving back so on to the good stuff.

Forms of Business Lending

There are more than a few different options.
Make sure you deal with either a direct lender with multiple loan options or a broker providing multiple business loan options. Don’t get stuck applying to a company that offers two or three options. This will ensure that your file and credit profile are worked from the top where the cheap interest rates are to the bottom. If your lender or broker doesn’t provide every one of these options then you should look elsewhere.

• Bridge Loan
• Equipment Leasing
• Hard Money Loan
• Invoice Factoring
• Line of Credit
• Merchant Cash Advance
• SBA Loan
• Secured Loan
• Unsecured Loan

A good lender or broker will have all of these options available to you because they want to present the cheapest cost of money they can. That is what gets deals funded and getting deals funded is what keeps lenders and brokers in business. Therefore you have the advantage when there are multiple options on the table.

Prepayment Penalties

Don’t let lenders fool you.
If there is one thing in this world a lender likes it’s getting paid off in full. So before you sign any paperwork make sure there are no prepayment penalties. Cash advance and unsecured loan lenders charge a flat cost for the money borrowed no matter how long it takes to pay back. That means that they won’t be shorted interest if you pay the loan off early. Therefore charging you to make their portfolio perform better than projected is just blasphemy.
Try to find the lenders that will actually reward you for paying off early. Always ask for a prepayment addendum which will give you final costs of monies borrowed on a month to month basis. If you have a good month and can pay your balance off early and save on interest, you would make my day.

Closing Costs

What is acceptable and what is junkr
Loans come with closing costs we all understand that. It’s the only way a lender can get a head start on getting paid back for their investment in you. Paying closing costs is ok. You can actually use them to your advantage. If a lender can at least recoup the overhead costs underwriting your application then they are satisfied. Anything else is what’s called junk fees. These fees are usually split between the broker and the broker’s firm. First, here is an example of acceptable closing costs.

• Lien Search – $100.00
• Site Inspection – $150.00
• UCC Filing Fee – $25.00
• Wire Transfer – $25.00
• Total = $300.00

That is what it truly costs to prepare your loan and that doesn’t include paying the underwriter. If a lender wants to charge points or a percent of the funding amount then you can actually use that to your advantage.
Closing points are just a bonus for the broker and or lender. You can trade closing points for interest. My advice is for every $500.00 paid in closing points you should have $1,000.00 deducted from the total cost of the money borrowed. Here is an example.

• Say you borrow $25,000.00 at a 1.12 factor costing $28,000.00 total
• The lender wants a 4% closing cost which is $1000.00
• You should negotiate $25,000.00 for a total cost of $26,000.00 with 4% closing costs
• Now that $25,000.00 cost you $27,000.00 and everyone is happy

Lenders have sweet spots too and that is getting paid back and getting paid back as fast as they can. By getting closing points they are staying ahead of payback projections. Investors don’t invest in books that pay back slower than projected so the more the lenders show books that meet or exceed projections the more investors give and that is after all the name of the game. So use this piece of leverage when you borrow because about 95% of lenders will take that deal all day long and if they don’t they weren’t the right lender for you.

File Behind Loans (Grasshoppers)

Knowing when to take a file behind loan.
File behind loans are the new big trend in the world of prime and subprime lending. There are lenders that will file their UCC behind another lender. Most lenders make you pay off a current balance with the new money you borrow because they want the 1st positio
UCC filing. A UCC is filed with your secretary of state by your lender to basically be the first to receive assets of yours should you default on your loan. 2nd position filers take the risk of there being nothing left to recoup after first position is satisfied. Therefore these lenders charge more for the money.
Sometimes it’s better to pay higher than previously paid interest. I know that sounds crazy but it’s the same concept as the refinance vs. reup. Here is a great example of what I am talking about.

• Say you have a balance of $10,000.00 and you need another $20.000.00
• You need to borrow $30,000.00 to net that $20,000.00 because you owe $10,000.00
• Say that $30,000.00 you borrow costs $33,600.00

You just paid $33,600.00 for $20,000.00 which is a 1.68 factor which is 68% interestr
Now let’s take a look at just taking a file behind loan. You do not have to pay off your current balance with these types of loans. You can actually pay a higher interest rate than you previously paid and it will still be the smartest and cheapest route to take. Here is the proof.

• Say you have a balance of $10,000.00 and you need another $20.000.00
• You only borrow the $20,000.00 you need
• Say that $20,000.00 you borrow costs $27,600.00

You just paid a 1.38 factor which is 38% interest which is 30% cheaper than the first option. So you can see how paying 38% interest when you originally paid 12% can be cheaper. Obviously you only want to take these file behind loans if something comes up that obligates you to come up with a certain amount of capital. As long as your profit margin exceeds the cost of interest paid then you are making the right decision.

Refinancing

The most important part of the loan process.
There are two ways to go about borrowing after you borrow and they are called refi’s and reups. When you have a loan balance and need to borrow again you are going to take one of these roads. Take the reup and here is why. When you refinance you are required to pay off your current balance with the new money you are borrowing. This is where your lender makes the bulk of their money. Here is an example. Say you have a current balance of $10,000.00

• Say you borrow another $25,000.00 for a cost of $28,000.00 to pay back
• $25,000.00 minus the $10,000.00 you owe means you net $15,000.00
• You just paid $28,000.00 for $15,000.00 which is a 1.86 factor which is 86% interest

When you reup you are only paying for the money you take. What changes is your total balance owed to the lender. You do not have to pay off your existing balance. You just pay for what you take and add the cost to your total owed. Here is an example.

• Say you have a current balance of $10,000.00
• Say you borrow $25,000.00 at a cost of $28,000.00 to pay back
• $25,000.00 minus nothing means you net $25,000.00
• You just paid $28,000.00 for $25,000.00 which is a 1.12 factor which is 12% interest

Before you even sign the loan documents for the first time make sure you ask your broker if you have to pay off your balance in full next time you borrow. If the answer is yes then hang up. That double interest you pay by refinancing will only put the business in a worse position which defeats the purpose of borrowing working capital. Remember, always reup. It’s beyond important from the first loan on.