Top 5 Red Flags in Small Business Financing Agreements

As we all know, when the economy goes south, small businesses get the short end of the stick when it comes to financing from banks. Luckily, there are numerous other financing sources that are able to step in and fill your needs. Unfortunately, these alternate funding sources can be predatory in their contracts, which it is extremely important to know what your contract consists of and how it will play out in the long run. If you read your contract carefully and know your actual financing needs and how they fit into your business goals, you likely will avoid getting burned.

1. Proposed Financing Amount

Firstly, make sure that the amount that you are being financed is enough to satisfy your needs. If you accept an amount that is outside of your business’ needs, you may be on the hook for repayment that is outside of your budget. On the other hand, you may need to look for another lender if you do not receive enough funding to cover your desired expenses. When looking at a proposed financing agreement, consider how the type of financing that you are applying for fits into your overall plan. Would you need to reapply for more funding, incurring additional application expenses? Make sure that the agreement that you are getting into makes sense.

2. Cost of Capital

This is one of the most important metrics to business owners looking for funding, but sometimes it is not very obvious. All of the terms and legal jargon can be difficult to understand and confusing. Look at the term length of your loan, as short-term loans tend to be more expensive than longer-term loans. In addition to the cost of the funding itself, you need to pay attention to what the repayment terms look like. Repayments that are too frequent can hurt your cash flows, but some loans require weekly, or even daily, repayments.

3. Hidden Fees

Hidden fees are given their name for a good reason. You may not fully realize the extra costs associated with your financing agreement, even after reading it carefully. For this reason, it may be a good idea to get a legal counsel to take a look at the agreement as well to look for issues. Are there prepayment fees? Are there fees for service or additional funding? In the end, these fees add up and if your lender is not completely transparent about these additional fees associated with your financing agreement, you should have some reservations about proceeding. To help avoid this, take a look at some reviews of the lender, and if others are saying the same thing, it may be smart to look elsewhere, as this is a huge red flag.

4. Are you locked into your contract?

Many financing contracts will lock you into the contract until you repay the loan. This is normal. But when looking through your agreement, look for termination penalties, or penalties for buy-outs. These fees can end up being quite high, so make sure that you stay informed about the penalties associated with termination. Ideally, you will want to stay with your lender because they are fitting your financing needs, but just be aware of how long your agreement will last and the repercussions of ending the agreement early.

5. Does the agreement make sense?

Assume that you read over your agreement multiple times and there seems to be no apparent red flags or discrepancies in the document. Say that the lender has decent client reviews and there is really nothing holding you back from signing the agreement. The last question you should, then, ask yourself is “does this agreement make sense?” Is this financing option going to improve your cash flows and help you grow your business? Many times, it is easy to get short sighted, focus on meeting payroll and simply surviving. But it is essential to not just look to survive, but to grow.

Red Flag-less Financing

When looking for financing options, it is best to shop around and find the best financing amount, rate, and services for your business. Flexibility and transparency are the best qualities to look for in an ideal lending partner. At US Capital Solutions, we are here to find the best lending solution for your business, with your goals in mind, maintaining complete transparency. If you are interested in speaking with one of our knowledgable account executives about financing options that will fit your business’ goals, click the button below.