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The True Cost of a Small Business Loan

There are a lot of online lenders providing a great service to small businesses across Canada that can’t always get traditional financing to help grow their business. The online small business loan industry started in Canada about 10 years ago but in the past couple years has really taken off and is becoming more and more mainstream.

As the industry grows, so does the number of companies offering small, short-term working capital loans. And so does the variety of the products and prices offered.

Many of these companies are aggressive, hard sell telemarketers that provide a verbal quote claiming the lowest rates available and convince you to make a formal application. We’ve heard from hundreds of small business owners that have been quoted a rate over the phone but when it came to sign the contract, saw a completely different rate.

Many companies are using “origination fees” that can cost up to 5% of the loan. Some charge a flat monthly “admin” fee. Others charge “insurance” fees and “renewal” fees.

Some are providing written quotes but have very strange ways of expressing the true cost of the loan.

For example, here’s a quote someone provided us from one of the larger online lenders in Canada

  • $60,000 over 24 months
  • 52 Bi-Weekly Payments of $1,560
  • Origination Fee of $1,800
  • Rate of 16.72% AIR

The quoted rate is 16.72%

But here’s the real cost:

  • The client was going to receive $58,200 (after the origination fee)
  • They were going to pay back $81,120 over 2 years (53 biweekly x $1,560)
  • The total cost of financing was $22,920
  • Total interest rate 39.4% ($22,920 divided by $58,200)

How could they have quoted a 16.72% rate? We have no idea.

To avoid wasting your time (and getting false information) always ask for a quote in writing. Ask if there any upfront fees and get the details on total payment amount and the total number of payments. Do the math yourself and see if it matches up with the quoted rate. If not ask them to lay it out for you.

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