Business loan rates change every year.
In 2019, as we head into the tenth year of recovery following the end of the Great Recession, there is uncertainty in the economy: The stock market just completed its worst year since 2008, and the Federal Reserve has been steadily raising its Federal funds rate.
This is a big component of determining business loan interest rates since it is the rate at which banks and other institutions lend money to each other (usually on an overnight basis).
What Affects Business Loan Interest Rates
Business loan rates are initially affected by the Federal funds rate since it is the basis of which all primary financial lending is done.
But for a small business loan rates, there other factors that affect how much interest is actually charged.
Perceived Risk of the Loan
This is typically tied to the amount of collateral that ensures the loan will be repaid. For example, mortgage loans are usually one of the cheapest forms of borrowing since they are secured by an actual piece of real estate. The lender also believes if a borrower lives in that home, they are likely to make that payment first. Loans that are collateralized by equipment of a company's accounts receivable tend to have a higher rate. Unsecured small business loans typically have the highest rates since they carry the most risk for the lender.
While longer term loans typically have a higher rate, it can be beneficial to secure a longer repayment period since it can give your company increased flexibility in payments without the risk of defaulting on the loan.
Here are the range of small business loan interest rates based on loan type I have recently seen in the marketplace:
● Traditional bank and SBA loans: 7-9 percent APR
● Equipment financing and business lines of credit: 8-25 percent APR
● Invoice financing through accounts receivable: 13-50 percent APR
● Online, short-term loans: 18-100 percent APR
● Merchant cash advances: 40-150 percent APR
The perceived risk is also affected by the business' credit rating as well as the principal owner's credit score. Remember, a credit rating typically reflects your history of borrowing and timely repayments. Most lenders believe that past behavior predicts future payments.
Repayment Period
This is how long your company is given to pay back the loan.
Shorter term loans typically have lower rates and longer terms are incrementally more expensive. Since there is more predictability in short-term market conditions, lenders can more easily consider immediate inflation and any interest rate or economy changes. This certainty dissipates over time and therefore results in a higher rate to accommodate the added risk.
Getting the Best Small Business Loan Rates for Your Company
Small business loan rates have a wide range. The more interest your company pays, the higher the money costs to borrow are (and the less profit you have to keep).
The following can help you position your business to get the best business loan rate:
1. Keep a high credit score.
Lenders feel much more comfortable with companies and people who have excellent credit scores. More certainty on getting paid back can help reduce their perceived risk and therefore increase the likelihood that they may offer a lower rate.
2. Collateralize your loans.
Lenders want to ensure their loan gets repaid even if the business fails. If you can offer collateral like real estate, sellable equipment or a personal guarantee, they may be more likely to offer a more favorable small business loan rate.
3. Ask for a longer period of time with no prepayment penalty.
While longer term loans typically have a higher rate, it can be beneficial to secure a longer repayment period since it can give your company increased flexibility in payments without the risk of defaulting on the loan.
However, try to negotiate no loan prepayment penalties if cash flow is better than you have anticipated.
4. Present up-to-date financial statements and forecasts.
Ensure that your monthly financials statements are accurate and you have a forecast of what the additional capital will do for your company.
Competently presenting these documents can improve your overall changes of getting better small business loan rates.
5. Form relationships with funding sources.
While metrics of past performance are important, lenders still give money to people they know, like and trust.
Build relationships with multiple funding sources so when the time comes, they are familiar with you and your company.
6. Shop around.
When you're offered a loan, consider asking for a lower rate. The worst they can say is “no."
And remember: Try to get approved for a business loan before your company actually needs it. This will give you time to find the best rate from a lender you can trust.
Read more articles on loans.
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