Why the “Best Rate” Isn’t Always Your Best Bet

Mar 9, 2021

Small business owners are often surprised to learn that the rate that looks best on paper isn’t necessarily the best program for their business. It may seem smart to jump on a loan offering a lower rate than the one you’re paying, but doing so without understanding the nuances of the terms can result in a situation known as “double dipping”—and it may end up costing you money.

Double-dipping is when a lender uses a new loan to refinance whatever is owed on an existing loan. For example, say you’re a business averaging $500,000 a month and get approved for $100,000 with a 1.15% factor rate (total cost of $115,000 over 12 months). It’s not much risk for the lender, since you’re only being advanced 20% of your average monthly revenue. 

When it becomes problematic is when something comes up—say, an emergency repair or an immediate hiring need—and you’re forced to request additional funding before the first loan is paid off. Here’s how it might play out:

Original loan amount: $100,000

Weekly payment: $2,211.54

# of payments: 52

Factor rate: 1.15

Total cost: $115,000

Twenty-six weeks later, you’re offered a renewal at “more favorable terms” for being a great client: $100,000 at a factor rate of 1.14. Sounds like a great deal, since the rate is a point less, right?

Think of it like this: it would be a good deal if your balance was zero. But since your balance is actually $57,500.82, you would end up losing money. Like this:

New loan amount: $100,000

Weekly payment: $2,192.31

# of payments: 52

Total cost: $114,000

Factor rate: 1.14

Balance owed: $57,500.82

Net amount (loan amount - balance): $56,499.18

With this new loan, you’ll only net $56,499.18—and now have debt for $114,000. And due to picking the “best rate” initially without really understanding what you were getting into, you’re most likely going to be in the same cycle in another 6 months.

At UpCrunch, we understand the ins and out of every lending program, which allows us to help you navigate potential landmines that may lie ahead. Whether you’re up for a renewal or want to learn more about how you can maximize the amount you net the first time, we’ll work backwards to show you the most you qualify for while ensuring the payment schedule works for your business today—and 12 months from now.