Making Sense of Loan Cost Metrics

Navigating the world of business loans is often difficult because disclosures can vary widely from lender to lender. When pricing metrics approach things like APR and factoring differently, how can you be expected to make an informed decision? It’s like trying to choose the best car for your family, but each manufacturer lists their vehicle’s total price, features, and gas efficiency differently.

Given these challenges, it’s crucial for you do your homework and approach each loan option with fresh eyes. First, you’ll want to identify how much money you’ll need. According to the Small Business Administration, the median small business loan is about $140,000. And most don’t exceed $250,000.

So where do your needs fall? Knowing the loan amount up front will help you search strategically and save precious time. Once you’ve selected some solid options, review the basic elements of each loan product. These include the amount financed, funds disbursed, total repayment amount, expected term, and the frequency of payback.

As you make an initial evaluation, line up the comparable elements so you can spot the contenders for best loan. Part of this process is seeking out hidden fees, such as early repayment fees, late fees, or processing fees. Some lenders charge these on a one-time or regular basis, so it’s important to know exactly what you’d be getting into if you were to choose a certain loan.

Next, you should focus on the four most popular pricing metrics to truly understand how much your loan would cost. Here’s a breakdown:

1. Total Cost of Capital (TCC): This metric accounts for all interest, fees on loans that don’t charge interest, and additional fees. Add them up and you’ll get a total dollar amount that is essential when comparing options.

2. Annual Percentage Rate (APR): This helps you determine the cost of your capital as a yearly rate, which can make it easier to determine what you can afford and what will work best for your business.

3. Average Monthly Payment: Breaking things down even more reveals the average monthly payment (which can be deduced even if your loan requires daily or weekly payments). It’ll help you see how much impact the repayment of a loan would have on your finances.

4. Cents on the Dollar: To get a clear view of a loan’s cost, it helps to see how much interest/fees you’d be paying for every dollar you borrow. Cents on the dollar is an effective way to get to accomplish this.

With so many different products available and diverse elements to consider, it’s helpful to have a way to consolidate information and judge things on a level playing field. To help make this possible, the Innovative Lending Platform Association joined forces with some of the industry’s most prominent lending platforms and other industry leaders to create a comparison tool called SMART Box™ (Straightforward Metrics Around Rate and Total cost).

One advantageous thing SMART Box™ does is encourage common language and clearer disclosure standards. And the pricing metrics and calculations used in SMART Box™ are critical for helping small business owners weigh their options and make informed decisions.

“Access to capital is a top priority for NSBA and we appreciate how SMART Box allows small businesses to more fully assess and compare lending options,” says Todd McCracken, President and CEO of the National Small Business Association. “This type of price transparency, along with best practices like the ones adopted by the Coalition for Responsible Business Finance (CRBF), will help solidify the trust between non-bank lenders and small businesses.”

In order to address the nuances of different types of financing, there are versions of SMART Box™ tailored specifically for term loans, merchant cash advances, and lines of credit. It’s worth noting all these tools are based on the assumption you will entirely repay your loan based on the terms of the agreement. If you miss payments, the results will obviously be negatively impacted.

It’s best to consider a tool like SMART Box™ as a complement to your usual due diligence. You’ll still need to meticulously review each lender’s disclosures and be sure to ask follow-up questions. If you aren’t able to reach a human being when attempting to contact a lender with questions, you’ll probably want to reconsider and go with another option.

Ultimately, this careful and thorough approach will help you move forward in the financing process with confidence. Because when it comes to finding business capital solutions, just as in life, knowledge is power.