It’s important to understand how interest works before you take out a loan. Different factors can impact your business loan rate, such as different interest rates. Learn the steps to getting a business loan and how to qualify for lower interest rates.
How Business Loan Rates Work
Interest is the amount you pay to borrow money, or the cost of getting a loan that you repay to the lender along with the principal. The funds borrowed from a lender incur a fee known as the interest, which is calculated with a rate that is a percentage of the money being borrowed. Interest and annual percentage rate (APR) are often used interchangeably, however APR also includes any other lender fees and charges. Business loan rates are determined by several different factors, including credit score, the type of loan, and the loan amount, to name a few. The lender may also have specific standards set or minimum requirements to qualify.
How Lenders Impact Rates
The interest rates on a business loan also depends on the type of lender you choose. Banks and credit unions are traditional lenders. They may offer loans with lower interest rates, but getting approved requires more work. Traditional lenders generally require higher credit scores, collateral, statements regarding business income, and overall more documentation. If you don’t qualify for loans from traditional lenders can apply with an alternative lender as they’re generally more lenient. Alternative lenders, or online lenders, offer an easier and faster application process, though the interest rates are generally higher than traditional bank loans.
How To Get the Best Business Loan Rates
To get lower interest rates, you’ll need to improve your business’s financial standing. You can work on many factors that can help you to meet the standards of traditional lenders that offer the most favorable terms. The interest rates of traditional lenders are generally lower, between 2% and 13%, compared to alternative lenders, which could be up to 100%. You should conduct research to determine the criteria to see whether you qualify, or could potentially qualify with minor improvements. In general, improving your credit score lowers your rate. Keeping your utilization rate below 30% can help increase your credit score. This includes both your personal credit score and business credit score as both may be considered for small business loans. Offering collateral may also help lower your interest rate, though this strategy carries additional risks that you may lose your property if you cannot repay the loan. Collateral is required for secured loans, as it serves to guarantee the loan, but it’s not required for unsecured loans, though a personal guarantee may be required instead.
Factors Impacting Rates
Lenders will generally consider several factors that can impact your interest rate, such as the purpose of the loan and the business’ expected growth. Other factors may include:
Ability to repay the loanGeneral character and reputationDebt and obligationsBusiness owner’s income and overall credentialsTax returns and financial statementsCollateral and capitalOther considerations specific to the lender’s standards
Fixed Rates vs. Variable Rates
Interest rates can either be fixed or variable. Variable rates can change depending on the market, while fixed rates stay the same throughout the period of the loan. Both variable rates and fixed rates can be beneficial, depending on the financial needs of the business. The starting rate for a fixed-rate loan is typically higher than that of a variable rate loan. But fixed-rate loans are considered lower risk because their rates won’t be affected by any changes in the market. Fixed rates can be ideal if the current rates are low or expected to increase later on, as well as for long-term business loans.
Variable Rate Loans
Variable rates, also referred to as adjustable rates, may be the ideal option if you are looking for a lower introductory rate. Variable interest rates may be more attractive if current rates are high and expected to decrease. Variable rates may be ideal for short-term business loans, but they are considered high risk because the changes are unpredictable.
How To Get a Business Loan
Here are a few key steps to take to get a business loan with a competitive interest rate.
Create a Business Plan
You’ll need to create a business plan before you begin applying for business loans because many lenders require one. Business plans help the lender to understand how you plan to run your business and how the loan could improve your business.
Work To Improve Credit
Credit score plays a big role in determining whether you qualify for a loan, as well as the interest rate you qualify for. Keep track of both your business credit and personal credit history as some lenders look at both. The higher your credit score, the less risky you are and lower your interest rate.
Conduct Research
Before you choose a lender, you should research your options in loans that fit the needs of your business. Understand the lender’s criteria and see if you meet their standards before you apply. For example, if a traditional lenders requires the owners to be in business for at least two years and your business is less than two years old, you’ll need to consider other options. You may also have certain priorities, such as getting the funds quickly. Loans may be processed faster with an alternative lender, though you’ll likely face a higher interest rate.
Necessary Documents
When you apply for a business loan, you’ll likely need to have certain financial statements and other documents handy. Not all lenders require the same documents, so this may vary depending on the lender itself. Some of the typical documents that might be required include tax returns, financial statements, bank statements, business licenses, and other documents regarding business debt.
