SmartBiz grew out of the 2008 financial crisis when it became almost impossible for small business owners to secure funding from traditional banks.
As the economy continues to improve, alternative lenders have filled that funding gap. Unfortunately, some use unscrupulous and predatory lending methods. This can lock small businesses into expensive loans, hampering financial stability and growth.
Small Business Borrowers’ Bill of Rights
To combat these predatory actions, the Responsible Business Lending Coalition has released the Small Business Borrowers’ Bill of Rights. This initiative identifies rights for small-business borrowers that include the right to transparent pricing and terms.
SmartBiz strongly supports the Small Business Borrowers' Bill of Rights. As an SBA provider, we are already held to the highest standards by government regulators and we are thrilled that others in the industry are beginning to hold themselves to similar high standards.
Loan Cost Transparency
How does this Bill of Rights affect small business owners? In a big way – you’ll now have access to a transparent loan rates with no hidden fees. Additionally, all key terms will be presented in an easy-to-understand manner. The loan amount, payment amount and frequency, collateral requirements, and the cost of prepayment will be clearly stated. Those who have signed the Bill of Rights will have to present everything needed for a comparison clearly and prominently, in writing, to the borrower.
This is great news for potential borrowers. However, once you have all the pertinent numbers, will you know how to choose the best loan product that will benefit your small business? There’s an easy calculation that will reveal the true cost of the loan so you can make an informed decision –loan constant.
Loan constant is an interest factor used to calculate the debt service of a loan. The loan constant, when multiplied by the original loan principal, gives the dollar amount of the periodic payment. The loan constant can be used to compare the true cost of borrowing. Given the choice of two loans, a borrower should opt for the one with the lower loan constant.
The loan constant for any loan is calculated easily:
- Take the required minimum monthly payment and multiply that amount by 12
- Take the result and divide it by the current outstanding loan balance
However you look at it, the interest rate is not the only thing to look at when determining what to pay back.
“It’s not just about APRs, it’s monthly payments,” says Evan Singer, general manager of SmartBiz, in a recent Forbes article. “It encapsulates the rate, the payment and the terms to have an apples-to-apples comparison,” Singer says. “The higher the loan constant, the worse it is for the business.”
Borrower's Debt Situation
- Lender 1 ($50k orig. balance): $2,400 / month @ $28,800 annual. Loan Constant=0.576
- Lender 2 ($25k orig. balance): $1,187 / month @ $14,244 annual. Loan Constant=0.56976
- Combined Cost of Capital ($75k): $3,587 / month @ $43,044 annual. Loan Constant=0.57392
Borrower's Debt Situation After Refinancing w/ SmartBiz
- Borrower took out a $150k loan with SmartBiz
- $49,092 went to refinancing the 2 loans and with additional funds for working capital
- SmartBiz SBA Loan ($150k balance): $1,665.31 / month @ $19,983.72 annual. Loan Constant=0.133225
With a SmartBiz SBA loan, small business owners will pay off pre-existing debt, lower the cost of capital *and* invest in their business long term. It’s a win-win – your business grows, the economy is strengthened.