How to Read a Business Loan Offer: Broker Checklist

The Anatomy of a Loan Offer Document

Every loan offer contains the same core components, but the way they are presented varies dramatically. Some lenders lead with the monthly payment (which sounds manageable), others with the rate (which sounds low), and almost none lead with the total cost (which is the number that actually matters). Here are the components you must identify in every offer: principal amount (how much you receive), total repayment amount (how much you pay back), interest rate or factor rate, APR (if disclosed — MCAs often skip this), payment frequency and amount, term length, origination fee, any other fees, prepayment terms, and personal guarantee requirements. If any of these components are missing from the offer document, ask for them in writing before proceeding. A lender who cannot or will not provide the total repayment amount is a lender you should not work with.

Hidden Fees: Where the Real Cost Lives

The stated interest rate is rarely the full cost. Here are the fees that inflate your actual cost of capital, often significantly. Origination fee: typically 1–6% of the loan amount, deducted from your disbursement. A $100,000 loan with a 3% origination fee means you receive $97,000 but repay based on $100,000. This immediately makes the effective rate higher than the stated rate. Documentation fee: $100–$500 for "processing your paperwork." This is pure profit margin disguised as a necessary cost. UCC filing fee: $50–$200 for filing a lien on your business assets. Legitimate cost, but some lenders mark it up significantly. Servicing fee: a monthly fee (often $25–$75) for "managing your account." Over a 36-month term, that is $900–$2,700 in additional cost. Prepayment penalty: some lenders charge 1–5% of the remaining balance if you pay off early. This penalizes success — if your business does well enough to repay early, you pay extra for the privilege. Late payment fee: typically $25–$50 per occurrence or a percentage of the missed payment. Understand the grace period and fee structure before signing.

Why "Low Monthly Payment" Can Mean "Enormous Total Cost"

This is the oldest trick in lending — and it works because borrowers focus on monthly cash flow impact rather than total cost. Here is how the trap works. Offer A: $100,000 loan, 15% APR, 24-month term. Monthly payment: $4,825. Total repayment: $115,800. Cost of capital: $15,800. Offer B: $100,000 loan, 22% APR, 48-month term. Monthly payment: $3,185. Total repayment: $152,880. Cost of capital: $52,880. Offer B has a lower monthly payment ($1,640 less per month), which feels more manageable. But it costs $37,080 more in total. The longer term and higher rate compound to make the "affordable" option three times more expensive. Always calculate total cost of capital: total repayment minus principal received. This is the true price you pay for the money. Then compare that number across offers. A higher monthly payment on a shorter term almost always costs less in total.

Red Flags in Offer Letters

If you see any of these in a loan offer, proceed with extreme caution — or walk away. No APR disclosure: the lender is either not required to disclose APR (MCAs, revenue-based financing) or is choosing not to. Either way, you need to calculate the effective APR yourself. If the total repayment amount and term are provided, you can use any online APR calculator. Vague repayment language: terms like "estimated repayment period" or "repayment may vary based on business performance" without specific numbers. This means the lender is not committing to a fixed cost, and your actual cost may be higher than projected. Automatic renewal clauses: some credit lines and revolving products automatically renew for another term if you do not explicitly opt out by a specific date. Miss the window and you are locked in for another year. Variable rate with no cap: a variable rate that can increase without limit exposes you to unlimited cost escalation. Acceptable variable rates include a ceiling (cap) that limits how high your rate can go. Confession of judgment: as noted above, this waives your right to defend yourself in court. Several states have banned this clause, but it appears in contracts governed by other states. Refuse to sign any agreement containing this provision.

The Before-You-Sign Checklist

Run through these items before you sign any business financing agreement. 1. What is the total repayment amount in dollars? Not the rate, not the monthly payment — the total dollar amount leaving your bank account over the life of the agreement. 2. What is the effective APR? If the lender will not provide it, calculate it yourself from the total cost and term. 3. What are ALL the fees? Ask specifically about origination, documentation, UCC filing, servicing, and late payment fees. Sum them and add to the total cost. 4. What is the prepayment policy? Can you pay off early? Does it save you money? Or is the total cost fixed regardless of payoff timing? 5. What happens if you miss a payment? What is the grace period, the fee, and does it trigger a default clause or rate increase? 6. Is there a personal guarantee? What assets are at risk? Can you negotiate the guarantee scope? 7. What are the covenants? Some loans require you to maintain minimum revenue levels, not take on additional debt, or keep certain financial ratios. Violating a covenant can trigger default even if you are current on payments. 8. Have you compared at least three offers? If not, get more options before committing.

Frequently asked questions

What is the most important number in a loan offer?

Total repayment amount — the sum of all payments you will make over the life of the agreement. This single number captures the interest rate, fees, and term length in one comparable figure.

Can I negotiate loan terms?

Yes, especially with online lenders and MCAs. The origination fee, rate, and prepayment terms are all negotiable. Having competing offers gives you leverage. Simply asking "can you match this competing offer?" often produces a better deal.

Should I always choose the lowest APR?

Not necessarily. A lower APR with a longer term can cost more in total dollars than a higher APR with a shorter term. Additionally, consider payment frequency (daily vs. monthly), flexibility (can you adjust payments?), and prepayment terms. APR is one factor, not the only factor.