Before You Sign a Commercial Loan: Look Beyond the Interest Rate

A lender offers the rate you wanted. The monthly payment appears manageable. The closing date works. It is tempting to treat the financing decision as settled.

Before signing, examine how the loan behaves over its entire life. A commercial loan affects your cash, your assets and your ability to make the next decision. The rate is one part of that relationship.

Follow the money from closing to repayment

Start with the amount you will actually receive. Ask which fees, reserves and other costs are deducted at closing, and which must be paid separately. Then map every scheduled payment through maturity, including any remaining principal due at the end.

In a hypothetical example, a $500,000 loan with a 2% origination fee carries a $10,000 origination charge. If that fee is withheld from the proceeds, the borrower receives less than the face amount before accounting for other costs. A headline rate cannot explain that difference.

Compare offers using the same funding requirement and realistic holding period. A loan intended to last six months should be evaluated differently from financing you expect to retain for several years.

Identify what can change

For a variable-rate loan, understand the reference rate, adjustment schedule and any contractual floor or cap. For an interest-only period, calculate the payment after it ends. Where the amortization period exceeds the loan term, ask for the projected maturity balance.

Read extension conditions carefully. An extension that requires lender approval should not be treated as money already available. Ask what documents, fees and performance tests would apply.

The same attention belongs on prepayment provisions. If a sale or refinance is part of your plan, determine how an early repayment would be calculated under the documents.

Understand the obligations beyond payments

Request a plain explanation of collateral, guarantees, reporting requirements and financial covenants. Have counsel examine provisions you do not fully understand, including defaults and any links to other obligations.

A useful review question is: what would put this loan under pressure even if monthly payments remained current? The answer depends on the actual agreement, not on a general description of the product.

Match the loan to the plan

Write down why you need the financing, what will repay it and what happens if the project takes longer than expected. Then compare that plan with the contractual deadlines.

If success requires a refinance, a sale and a valuation increase to occur on schedule, the funding structure deserves a second look. Good financing should give the business a workable route through realistic setbacks.