Small Business

4 ways to avoid a small business debt twilight zone

Small business debt gets a really bad rap, but sometimes owing someone money isn’t so bad. Before you laugh, hear us out: an affordable loan with a responsible lender over a set period of time can be a good thing for your business if it helps you grow. Growth capital and better cash flow can help you buy that new warehouse, purchase enough inventory for busy season, or expand to a new location.

On the other hand, sometimes debt can spiral into a confusing, expensive mess that feels impossible to escape. No business owner ever envisions facing last-resort options like filing for bankruptcy, or having to liquidate valuable equipment to make repayments.

Luckily, nightmare debt scenarios are entirely preventable: you just have to find a lender with your business’s best interests at heart, and ask the right questions to ensure you’re getting a fair deal.

Here are four ways to avoid getting caught in the small business debt twilight zone:

1. Figure out if a loan is necessary—or just a cherry on top

Serious question: Do you actually need a business loan? If you’re considering new debt because you have a thorough plan for using those funds to grow your business, that’s fantastic. Taking on debt because a lender sent you a “one-time” offer that looked interesting? Maybe not as wise. Before you start shopping for lenders, figure out how a loan could help you accomplish the goals you have for your business (tip: ask your accountant or financial advisor for help!). If you realize you’re A-okay with the funds you currently have, then you just saved yourself from taking on unnecessary debt. If you decide your business would benefit from more financing, you’ll be savvy enough to avoid lenders attempting to up-sell you on more than what’s necessary.

At Funding Circle, we match you with a personal loan specialist to answer your questions in plain English terms, so you can make the wisest decision possible for your business. We work with you to size your loan to meet your needs, not ours.

2. Sharpen your “debt trap” radar

As a small business owner, you have the right to loan products that will not trap your business in costly cycles of borrowing—and then borrowing some more, to stay afloat with the money you’ve already borrowed (we’re getting dizzy already). When considering your options, look for a lender whose success comes from your success—not your potential default.

One of the easiest ways to tell if a lender is on your side? Ask about early repayment rights. Many short-term lenders charge outrageous fees to small business owners who pay off their loan early. At Funding Circle, we celebrate your success—if you are able to pay off your loan early, go ahead. You won’t be penalized. We also provide an amortization schedule upon request, so you know your payment schedule ahead of time (try getting one of those from your bank!).

That’s not the only way we’ve got your back: we also only extend new credit to a small business if they have a solid repayment plan in place for any debt they might already have. If you’re interested in refinancing bad debt, we can help with that too.

3. Calculate the TRUE cost of your loan

This probably doesn’t come as a surprise to you, but business loans aren’t free—and sometimes, it’s tough to add up just how much they’ll cost you. You have the right to know the complete cost and terms of any loan you are offered—in a straightforward format that’s easy to compare to other offers, and empowers you to make the smartest decision for your business. Will you be asked to cough up application fees, service charges, initiation fees, annual charges, origination fees, or fees that seem totally made-up? You deserve to know.

For example, any good lender should happily help you calculate your Annual Percentage Rate (APR)—which gives you a more complete picture of the cost of your loan. If they won’t, learn how to calculate it yourself — and find a better lender! At Funding Circle, we offer upfront fixed rates as low as 4.99%, and only ask for a one-time origination fee of 0.99% to 6.99%. We are happy to help you calculate your APR. That’s it. No hidden costs or fees — ever. Period. The end.

4. Don’t get distracted by speedy, shiny objects

Yes, many short-term lenders, like merchant cash advance providers, can put money in your account in under 24 hours—but at what cost? If you can wait to receive the funding you desire, then save yourself the money you’d throw away on sky-high interest rates and hidden fees by waiting it out for a more responsible online lender. You deserve a “pressure-free” situation, so don’t ever feel coerced into sticking with the first offer you receive—especially if you think you can get a better deal somewhere else. Taking on additional debt for your business is a super important decision, and you shouldn’t feel rushed.

At Funding Circle, we know that time is money for small business owners like yourself, so we work hard to turn around a decision in as little as 24 hours. The flipside: we also respect your decision-making process and don’t hold you to an artificial timeline.


At Funding Circle, we believe small businesses deserve better. Learn more about your rights as a small business borrower here.

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