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The good news: you’ve been offered the small business loan you applied for.
The bad news: the loan offer costs way more than you expected.
What should you do? Here are 7 steps you can take when your loan offer comes in at a higher interest rate than you expected.
Don’t jump at the first loan offer you get—especially if it’s more expensive than you’d hoped it would be.
Instead, do your homework and look for more affordable options.
In order to compare apples to apples, make sure you understand the APR (annual percentage rate) of each loan you’re considering. Not all lenders disclose their APRs upfront, but because this number rolls in additional fees and miscellaneous charges you might not ordinarily take into account, it’s the best way to do a direct comparison between loans.
But what to do if your lenders don’t offer information about APR?
Thankfully, you can actually figure it out yourself, either by asking your accountant or checking out an online APR calculator.
In fact, even if your loan offer doesn’t come with that expensive of an interest rate, it’s a good idea to shop around for business loans anyway—it’s a habit of smart borrowers. Shopping around your loan options helps you be confident that you’re getting the best deal possible given your borrowing circumstances.
Once you know the reason, is there something you can do about it?
For example, if you have bad credit, perhaps you need to focus on repairing your personal credit before you take out a loan. Or, maybe you should consider other types of business loans for bad credit profiles.
Or if your business is fairly new and hasn’t yet established strong business credit, you might want to focus on improving your business credit or waiting to hit the 2-year mark before you can get a cheaper loan. If you need capital for your business in the meantime, consider financing your start with a business credit card.
Sure, the loan offer is more expensive than you expected it to be—but is it still doable?
If this loan offer is the best you can qualify for, if you really need the money, and if you can pay it back, maybe it’s worth the cost.
Work with your business accountant to carefully assess not only the cost of paying back the loan, but also the expected effect the loan will have on your business.
For example, if an expensive business loan will let you launch a new product line that financial projections show will double your revenue, maybe you shouldn’t worry so much about the price tag of the loan. But if repaying the expensive business loan will tie up your working capital and leave other aspects of your business strapped for cash, the business funding might not be worth the cost.
Depending on how expensive your loan offer is, you might want to investigate alternative lending options like credit card financing, invoice financing, or merchant cash advances.
Keep in mind, though, that alternative financing tends to be more expensive than traditional business loans anyway. Your accountant can help you run the numbers and see which option is best for you.
If time is not of the essence—for example, if you’re seeking financing for a planned expansion or to start a new business, and you can wait on taking action—you could skip financing altogether and either save up or generate enough capital to accomplish your business goals without taking out a loan.
Then, when you have some business experience and capital under your belt, you can pursue the small business funding you need to grow your business.
If your major concern is not big monthly payments but the high interest rate and the overall amount of interest you’ll be paying over the life of the loan, prepayment might save you money in the long run.
Of course, you’ll need to make sure that the loan doesn’t have a prepayment penalty, and you should also talk to your accountant about whether your cash flow can handle making a large prepayment.
(Read more about the prepayment penalty and how to decide whether prepayment is a good idea.)
In case you didn’t get the hint after reading this far, I’ll spell it out: always talk to your accountant about any sort of business financing you’re considering.
Your accountant can help you plan how to finance your goals, understand the likely effect that financing will have on your sales, and determine whether a specific loan offer is a smart move for your business—or simply a drain on your finances.
Remember, you don’t have to take the first small business loan you’re offered. In fact, you should only take that loan once you’ve shopped your options around and are confident that it’s the best financing for your business.
If your loan offer comes out a little more expensive than expected, run through this 7 step checklist to figure out what happened and how you can move forward.