In short
- Start with three numbers: the cash you actually receive, the total you repay, and the payment size and frequency.
- Then read the fine print: fees, prepayment terms, personal guarantee, security registration, collateral and default clauses.
- Compare offers in dollars and on an estimated annual rate, not on how the price is described.
- If a clause is unclear, ask for it in writing, and have a lawyer review anything large or unusual.
Why the offer deserves an hour of your time
Most business owners spend weeks deciding whether to borrow and minutes reading the offer. That is backwards. Two offers for the same amount can differ by thousands of dollars in cost, and by much more in what happens if the business hits a rough patch. This guide walks through each part of a typical offer for a term loan, line of credit, equipment financing or merchant cash advance, then gives you a checklist to use on every offer.
1. The three numbers that matter most
Cash you actually receive
The headline amount is not always what lands in your account. Origination, underwriting, administration or broker fees are often deducted from the funding. If an offer says $100,000 but deducts a 3% fee, you receive $97,000 while repaying on the full $100,000. Ask for the net funded amount in writing.
Total payback
This is the total of every payment you will make over the full term, plus any fees not already deducted. It is the single most useful number for comparing offers, because it cuts through how the price is described. For a factor-rate product, it is the amount funded times the factor rate. For an interest-bearing loan, ask for the total of payments on the schedule.
Payment size and frequency
Payments may be daily, weekly, bi-weekly or monthly. Convert every offer to a monthly figure so you can compare: daily business-day payments times roughly 21, weekly times about 4.33, bi-weekly times about 2.17. Then compare that to your normal free cash after all bills, in a slow month, not an average one.
2. APR versus factor rate
Loans are usually priced with an interest rate or APR. Advances and some short-term products use a factor rate, such as 1.25 or 1.35. A factor rate is not an interest rate: 1.30 does not mean 30% a year. Because the fee is fixed on the full amount and the term is short, the equivalent annual cost is often much higher. Our guide to factor rate vs APR shows the worked math.
Some jurisdictions now require certain disclosures on commercial financing offers, such as the total cost or an estimated annual rate. Whether or not a disclosure is required where you are, you can ask the provider to state the estimated APR, and you can estimate it yourself with a spreadsheet IRR on the payment schedule.
For reference, illustrative ranges in this market are roughly 8-30% APR for term loans, 8-25% for lines of credit and 6-20% for equipment financing, with merchant cash advance factor rates roughly 1.15-1.45. Your offer depends on your revenue, time in business, credit and the lender.
3. Fees
List every fee in the offer and the fee schedule. Common ones include:
- Origination or underwriting fee: a percentage of the amount, often deducted up front.
- Administration or closing fees: flat charges for processing the file.
- Draw fees and maintenance fees on lines of credit, which can apply each time you draw or monthly whether or not you use the line.
- Late payment and returned payment (NSF) fees: check the amount and how often they can be charged.
- Documentation, lien registration or search fees.
- Broker fees: if an intermediary charges you directly, it should be disclosed. CELER Funding never charges you a fee.
4. Prepayment terms
Ask what happens if you pay the balance off early. There are three common patterns:
- Interest stops when you pay: you save the remaining interest. Best for you.
- Prepayment penalty: you pay a charge for repaying early, sometimes a percentage of the balance or a set number of months of interest.
- Fixed cost regardless: common with factor-rate products. You owe the full agreed amount no matter when you pay, unless there is a written early payoff discount.
If you expect to refinance or pay early, the prepayment terms can matter as much as the rate.
5. Personal guarantee
Most small business financing requires the owners to sign a personal guarantee. That means if the business cannot pay, the lender can pursue you personally. Read whether the guarantee is:
- Unlimited (covers the full debt plus costs) or limited to a set amount.
- Joint and several, where each guarantor can be pursued for the full amount.
- A validity or performance guarantee, common with advances, where you promise the business will follow the agreement (for example, not switching bank accounts to block debits) rather than guaranteeing repayment in all cases. Read exactly what triggers it.
Also check whether a spouse or other owners are being asked to sign, and why.
6. Security registrations: UCC liens and PPSA registrations
Lenders often register a security interest to record their claim on business assets.
- In the US, this is typically a UCC-1 financing statement filed with the state, often called a UCC lien. It can cover a specific asset or be a “blanket” lien on all business assets.
- In Canada, the equivalent is generally a registration under the provincial personal property security legislation (PPSA) in common-law provinces, with a different system in Quebec. It can also be specific or cover all present and after-acquired property.
Why it matters: a blanket registration can make it harder to get other financing later, because the next lender will see that someone else has a prior claim. Ask what the registration covers, and whether it will be discharged promptly once you pay in full. After payoff, check that it has been removed.
7. Confession of judgment
Some agreements, particularly with short-term funders in the US, have included a confession of judgment. By signing one, you agree in advance that the funder can obtain a court judgment against you if they say you defaulted, without the usual lawsuit in which you get to respond. Some states restrict or do not allow these clauses, and the rules have changed over time. If an offer includes a confession of judgment or anything similar, have a lawyer explain it before you sign, and ask whether it can be removed.
8. Collateral
Beyond a general security registration, some financing is secured by specific assets: equipment, vehicles, real estate, receivables or inventory. With equipment financing, the equipment itself is usually the collateral, which is part of why it can be easier to approve. Check which assets are pledged, whether you can sell or replace them, whether insurance naming the lender is required, and what happens to them if you default. If real estate or personal assets are involved, get legal advice.
9. Default clauses
This section decides how bad a bad month can get. Read:
- What counts as a default. Missed payments, obviously, but also things like a drop in revenue, a change of ownership, a new lien, another financing, a lawsuit, or a “material adverse change” in the business.
- Cure periods. Is there time to fix a missed payment before it becomes a default?
- Acceleration. Can the full balance become due immediately?
- Default interest and fees. Rates or charges that apply after default, and legal costs you may have to pay.
- Cross-default. Whether a default on another agreement counts as a default on this one.
- Restrictions (covenants). Limits on taking other financing, which are especially common in advance agreements. Breaking one can be a default. See our guide to MCA stacking.
10. Other terms worth a look
- Variable vs fixed rate: if the rate is variable, what is it tied to, and how often can it change?
- Renewal terms: automatic renewals and whether new fees apply.
- Payment method: automatic debit authorisations and how to change your bank account.
- Reconciliation: for advances with fixed debits, whether you can ask for payments to be adjusted to your actual sales.
- Governing law and disputes: which province or state's law applies, and whether disputes go to arbitration.
The checklist
- Net amount I will actually receive: $____
- Total of all payments: $____
- Cost of the money (total payback minus net received): $____
- Payment: $____ every ____ (monthly equivalent $____)
- Term: ____ months. Fixed, or does it depend on my sales?
- APR or factor rate stated, and my estimated annual rate: ____
- Every fee listed, with amounts: ____
- Early payoff: interest stops / penalty / full amount owed / discount of ____
- Personal guarantee: yes/no, limited/unlimited, who signs
- Security registration (UCC or PPSA): specific assets or all assets? Discharged on payoff?
- Confession of judgment or similar clause: yes/no
- Specific collateral pledged: ____
- Default triggers, cure period, acceleration, default fees
- Restrictions on other financing
- Can the payment comfortably be covered in my slowest month?
- Have I compared at least one other offer or product type? See the compare page.
How CELER Funding helps
CELER Funding is a free referral service, not a lender. We introduce you to independent lenders and funding companies across Canada and the United States, and lenders may pay us a referral fee when a deal closes. We want you to see the net amount, total payback and payment schedule before you sign, and we are happy to go through an offer line by line with you. To get offers to compare, you will usually need recent business bank statements and a completed application; see documents lenders need.
This guide is general information, not legal, tax or financial advice. Contract terms and the rules that apply to them vary by province and state. For anything large or unusual, have a lawyer review the agreement. When you are ready, tell us what you need.