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Before signing any business loan, ask the lender six questions in writing: (1) What is the total payback amount? (2) What is the effective APR or factor-rate equivalent? (3) What are the prepayment terms and any early-payoff penalties? (4) What are the late fees and the default trigger? (5) Is there a personal guarantee, and what is its scope? (6) Can I see the actual loan agreement, not just a term sheet? Get every answer in writing. Verbal assurances do not survive once you have signed.
Most owners who end up in a bad loan did not get tricked. They got rushed. The salesperson is friendly, the term sheet looks reasonable, the funding date is tomorrow, and the actual loan agreement does not arrive until the wire is already moving. This guide gives you the exact questions to ask, in the order to ask them, with the answers a credible lender should be able to give you in writing before you sign.
The six critical questions to ask before signing
These are not optional. If a lender will not give clean answers to all six, that is your signal to walk. Every legitimate lender, including TurboFunding, can answer all of these in plain numbers.
1. What is the total payback amount, in dollars? Not the rate, not the factor, not the monthly payment. The total dollar amount you will repay across the entire term, including every fee. Origination, administrative, processing, ACH, monthly servicing, and closing fees all add up. A $100,000 loan at a quoted rate of 12% can have a total payback closer to $128,000 once 4% origination, monthly service fees, and a closing fee are baked in. The total payback number cuts through every other piece of marketing.
2. What is the effective APR, or factor-rate APR equivalent? A 1.30 factor rate on a 6-month merchant cash advance is roughly a 60% effective APR, not 30%. The factor rate looks small because it is expressed as a multiplier on the principal, but you are paying it back in 6 months, not 12. Always convert. Our guide to business loan rates explained walks through the math. For MCA specifically, see what is a merchant cash advance.
3. What are the prepayment terms? This is the single most expensive question owners forget to ask. Many MCA and factor-rate products require you to pay back the full agreed amount no matter when you repay. Pay off a $130,000 MCA in month two and you still owe the full $130,000. Bank loans typically charge a 1% to 5% prepayment penalty in the early years. SBA 7(a) has a prepayment penalty only in the first 3 years on loans with terms of 15 years or longer. Ask for the exact dollar cost of paying off the loan at month 3, month 6, and month 12.
4. What are late fees and the default trigger? Standard late fees run 5% of the missed payment after a 10 to 15 day grace period. The bigger question is what counts as default. Missing a single payment? Two? Going below a debt service coverage ratio (DSCR) covenant? A change of ownership? Default lets the lender call the entire balance due immediately. Read the default section of the agreement word for word.
5. Is there a personal guarantee, and what is its scope? Almost every small business loan under $5M includes a personal guarantee (PG). What varies is the scope. A limited PG caps your personal exposure at a specific dollar amount. An unlimited PG puts your personal assets on the line for the full debt. A joint-and-several PG with a partner means the lender can collect 100% from either of you, not 50% each. The PG is a separate document. Read all of it, not just the loan agreement.
6. Can I see the actual loan agreement, not just a term sheet? This is the question that separates serious lenders from sales operations. The term sheet is a summary. The loan agreement is the contract. We cover this in the next section because it deserves its own discussion.
Why you need the actual agreement, not just a term sheet
A term sheet is a non-binding summary that highlights the headline numbers: principal, rate, term, payment. It is also, in most cases, a sales document. The loan agreement is the binding contract that controls every dollar of the relationship, including dozens of provisions that never appear on the term sheet: confession of judgment, jurisdiction and venue, mandatory arbitration, attorney's fees clauses, default acceleration, cross-default to other loans, security interests on receivables, and assignment rights that let the lender sell your loan to a collection shop the day after closing.
Here is the pattern to watch for. A salesperson sends you a term sheet on Monday, asks you to e-sign a non-binding commitment on Tuesday, requests bank statements and a personal financial statement on Wednesday, and emails the actual loan agreement at 5pm on Thursday with funding scheduled for Friday morning. You have 14 hours to review a 30-page contract. That is not an accident. That is the funnel working as designed.
Push back. Ask for the loan agreement and the personal guarantee in full, in PDF, at the same time as the term sheet. A legitimate lender will send them. If a lender refuses to share the agreement until you have signed the commitment letter or paid an application fee, treat that as a hard signal to walk. Our guide on the find a trustworthy business lender and broker vs direct lender difference cover the structural reasons this happens.
When you have the agreement, read four sections in this order: default, prepayment, fees, and the personal guarantee. Those four sections contain 90% of the surprises. Total reading time is 30 to 45 minutes for most agreements. That is the cheapest 45 minutes you will ever spend.
Get every answer in writing
Verbal assurances do not survive the closing. Once you sign, the contract is the contract. If a salesperson tells you the prepayment penalty is "negotiable," the late fee will be "waived if it is a one-off," or you can "refinance into a lower rate after 6 months," those promises are worth zero unless they appear in the loan agreement or in a side letter signed by an authorized officer of the lender.
The practical move is simple. Send a follow-up email after every call that says, in plain language: "Confirming what we discussed today: total payback is $X, effective APR is Y%, no prepayment penalty after month 6, late fee is 5% after a 10-day grace period, personal guarantee is limited to $Z. Please confirm by reply." Save the reply. If the agreement contradicts the email, you have evidence. If the lender will not confirm in writing what they said on the phone, they are telling you the verbal promise was not real.
The same logic applies to fee schedules. Ask for a written fee schedule with every fee the lender charges, named, with the dollar amount or percentage. Origination, processing, administrative, monthly service, ACH return, modification, prepayment, late, default, UCC filing, and any back-end fees. If a fee is not on the schedule and not in the agreement, the lender cannot collect it later. If you find a fee in the agreement that was not on the schedule or quoted to you, that is a red flag and a negotiation point. For the full document set you should expect on any deal, see our business loan documentation checklist.
How TurboFunding Helps
TurboFunding gives every applicant the answers to all six questions before you sign. You get a clear total payback number, the effective APR (or factor-rate APR equivalent for revenue-based products), written prepayment terms, the full fee schedule, the scope of the personal guarantee, and the actual loan agreement to review. We fund term loans, SBA 7(a), SBA 504, lines of credit, equipment financing, bridge loans, and revenue-based advances from $10K to $5M, with 550+ FICO accepted on revenue-based products, $10K+ monthly revenue, and 6+ months in business. Our 3-minute application uses a soft credit pull, so checking your rate has no impact on your score. Find out More.
Frequently Asked Questions
Q. What is the difference between APR and factor rate?
A. APR is an annualized cost of borrowing expressed as a percentage. Factor rate is a flat multiplier on the principal, common in MCA and revenue-based products. A 1.30 factor rate means you repay 1.30 times the principal. On a 6-month term, that converts to roughly a 60% effective APR. Always convert factor rates to APR before comparing offers across products.
Q. Can a lender change terms after I sign?
A. Generally no, not unilaterally. The loan agreement is a binding contract. The lender cannot raise your rate, add fees, or change the term outside what the agreement permits. Watch for variable-rate clauses, modification rights tied to default, and assignment provisions that let the lender sell the loan to a third party who may service it differently. See variable vs fixed rate business loans for the rate-change mechanics.
Q. Is a personal guarantee always required?
A. For small business loans under $5M, almost always. SBA requires PGs from any owner with 20%+ equity. Banks require PGs on almost every commercial loan to a closely held business. The exceptions are large corporate facilities (usually $10M+) and some asset-based lending structures where the collateral fully covers the exposure. What you can negotiate is the scope: limited vs unlimited, dollar cap, carve-outs for fraud only, and burn-off clauses that release the PG after performance milestones.
Q. What does "subject to underwriting" actually mean?
A. It means the offer is conditional and not yet binding. The lender can still decline, reduce the amount, or change the rate after reviewing your full financials, tax returns, bank statements, and any third-party verifications. A term sheet marked "subject to underwriting" is an indication of interest, not a commitment. Do not stop shopping or turn down other offers until you have a signed commitment letter and a clear loan agreement in hand.
Q. Can I negotiate the prepayment penalty?
A. Sometimes, depending on the product. Bank term loans and SBA loans usually have fixed prepayment structures you cannot move. Non-bank term loans and lines of credit often have room to negotiate, especially the burn-off schedule (5% in year one, 3% in year two, 0% after). MCA and factor-rate products almost never let you negotiate full-payback requirements because the entire pricing model assumes it. If prepayment flexibility matters to you, choose a product that prices it in from the start.
The owners who avoid bad loans are not smarter or better connected. They are slower. They ask all six questions, they read the agreement, and they get answers in writing before they sign. Forty-five minutes of review on the front end beats forty-five months of regret on the back end. If you want a lender that will give you straight answers to every one of these questions in writing, before you commit to anything, apply in 3 minutes with a soft credit pull. Find out More.