How to read a business funding offer before you sign
A funding offer can look affordable on the first page and very different by the last. Check each of these points with the full contract in front of you, not a summary, a term sheet or a sales email.
Add up the total cost of capital
Start with one number: everything you will repay minus the cash that actually reaches your account. That difference is the cost of the money, and it should include every fee, not just the interest or factor charge.
Pay close attention to the net amount. If a $100,000 offer deducts $4,000 in fees at closing, you receive $96,000 but repay as though you had $100,000, so the real cost is higher than the quoted rate suggests.
Ask the provider to answer these in writing.
- What is the total repayment amount, in dollars?
- How much cash will I receive after every deduction?
- How many payments are there, how often and over what period?
- Does any part of the money go to pay off an existing balance?
Convert every price to an APR
Offers are priced in ways that can’t be compared directly. Simple interest charges a rate on the remaining balance. A factor rate multiplies the amount funded to set a fixed repayment, so a 1.25 factor on $80,000 means repaying $100,000 however quickly you pay, and some providers quote a flat monthly rate instead.
The annual percentage rate, or APR, puts them all on one scale by counting fees and the speed of repayment. Speed changes everything: assuming equal payments and no other fees, that same $20,000 charge works out to an APR of about 15 percent if repaid monthly over three years, but more than 90 percent if collected in daily debits over six months. Ask the provider for an estimated APR, or calculate it from the net amount you receive and the actual payment schedule.
List every fee
Fees can add several percentage points to the cost, and some come out before you see a dollar. Ask for a written list, and ask who pays the broker and how much: a broker paid by the funder may steer you toward the offer that pays the broker best.
- Origination or funding fees, often a percentage of the amount, deducted at closing.
- Underwriting, documentation, processing or administrative fees.
- Broker fees, which may be paid by you, by the funder or by both.
- Late, returned-payment and default fees, and how quickly they add up.
- Ongoing account, wire or ACH fees charged during repayment.
Check how and when you repay
Many short-term products collect by automatic debit every business day or every week. A daily debit of $700 sounds small, but across a month of about 21 business days it comes to roughly $14,700, taken before rent, payroll and suppliers are paid. Test the payment against your slowest month, not your average one.
Then read the prepayment terms. With a simple-interest loan, paying early usually saves interest. With a factor-rate product, the full repayment is often owed regardless, unless the contract includes an early-payoff discount, and that discount should be written into the contract in dollars.
Know what you are pledging
A personal guarantee makes you answerable for the debt if the business can’t pay, which can put your savings and possibly your home within reach. Some guarantees cover only fraud or the breach of specific promises, while others cover the full balance, so read which kind you are signing.
Many funders also file a UCC-1 financing statement, usually with the secretary of state, giving public notice of their claim on business assets. A blanket lien reaches all of them, including receivables, equipment and inventory, and can block other financing until the debt is paid and the lien is released. Ask whether the lien can be limited to specific assets, and get written confirmation that it will be terminated at payoff.
Read the clauses that bite later
A confession of judgment is a document in which you agree in advance that the funder can have a court judgment entered against you, without a lawsuit, if it says you defaulted. That can lead to frozen bank accounts before you have any chance to respond. Some states restrict them, and in 2019 New York stopped allowing them to be entered against borrowers who live outside the state.
Stacking means taking a second advance or loan on top of an existing one. Many contracts forbid it, and two sets of daily debits are how many businesses fall behind. Treat renewal offers with the same caution: when new funding pays off the old balance, you may pay a fresh charge on money that only refinanced what you already owed.
Spot broker red flags and use disclosure rules
Several states, including California and New York, now require providers to give standardized cost disclosures for many commercial financing offers, and in those two states the disclosure includes an estimated APR. Ask for the disclosure even if you aren’t sure your state requires one, and walk away from anyone who won’t put terms in writing. Treat any of these signs as a reason to stop.
- Upfront fees requested before any money is funded.
- Promises of guaranteed approval, regardless of credit or revenue.
- Pressure to sign the same day or before you have read the full contract.
- Blank spaces, missing pages or terms that differ from what you were told.
- A company name on the contract that doesn’t match the one you have been dealing with.