This post is the second in a series presented by Breakout Capital, a technology enabled nationwide lender for small businesses with a focus on transparency, straight-forward working capital solutions, and doing what’s right for small business. This series is intended to provide education for small businesses on topics that are not only important, but rarely discussed.
- After my first loan, what happens if I need more capital?
This is a critical question to ask, especially if you are accessing short-term financing. Responsible borrowers typically won’t borrow more money than they need, which leads us to the following question: what happens if you need more money?
You may think you can just go back to your original funder and request more capital, but many short-term funders won’t allow you to access more money unless you are 50% or more paid down on the original financing. And once you do qualify for additional capital, what happens to your outstanding balance? In today’s financing environment, short-term lenders require small businesses to pay their current balance in full before the funder will provide the small business with additional capital …and require you to use the money from the next loan to pay off the outstanding balance.
So what’s the problem with this? This is called Double Dipping and causes the business to pay twice for the same money. Double Dipping significantly increases the cost of a funding to a small business (and in turn, significantly enhances the lender’s revenue) and frequently there is little to no disclosure about the Double Dip, much less the effective cost of the Double Dip. If you receive funding from a provider that Double Dips at renewal, you are likely paying an incremental $2,500 to $10,000+ for each renewal or refinancing.
Before you sign your funding contract, directly ask your funding provider if they Double Dip at the time of renewal. If they say they don’t know, it’s likely they do and you may end up paying a lot more for your capital than you expected.
- What happens if I want to pay off my loan early?
There are two distinct terms to understand here: “no prepayment penalties” and “early repayment discounts”. They may sound the same, but the meaning is very different. If a loan has “no prepayment penalty”, that means you can pay off the remainder of the financing contract at any point without any additional fees outside of contractual amount owed; but that does not necessarily mean you can pay off your contract by just repaying the remaining principal. In the short term financing market, this distinction is critical. Most short-term lenders use “fixed cost” contracts which, instead of accruing interest on a daily, weekly, or monthly basis, state the amount owed regardless of when the contract is paid in full. In these cases, you need to ask your potential funding provider if there is any early repayment discount or early repayment benefit. An early repayment discount allows you to repay a “fixed cost” contract early and the lender will waive a certain amount of unpaid interest or fees.
Breakout Capital is committed to responsible funding. We believe it is better for you to keep your business and grow it responsibly than set it up to fail with insurmountable debt. Please contact us today if you’d like to partner with us.