Business Loan Rates – What You Should Know
In the search for small business loans, many borrowers focus on the loan amount, repayment terms, and interest rates only.
Rarely do they ask about all the rates and fees associated with the loan they intend to take out.
No matter how attractive the interest rates are, a loan may turn out to be expensive in the long run if you factor in other fees, penalties, and costs associated with borrowing.
As a business owner, it’s important to factor in all these costs before closing any loan deal. By taking all these factors into consideration, you’ll not only end up with an affordable loan, but also ensure that your loan payments do not ultimately affect your cash flows and profits.
In this article, you’ll learn all the rates and fees charged when taking a loan, how they work and some of the factors that affect your interest rates.
Let’s delve in already.
The 3 rates charged on business loans
- Interest rate
You are probably more familiar with loan interest rates. This is the amount lenders charge for allowing you to use their money. It is usually expressed as a percentage of the amount you borrow (principal). Interest rates can be calculated in two ways: simple interest and compound interest. Simple interest formula takes into account the principal, annual interest rate, and the loan duration usually in years. So, let’s say you took a loan of $100,000, payable in 5 years and on an interest rate of 35%, your total payment after the term will be:Simple interest = $100,000 *35% *5
When using compound interest, on the other hand, it re-calculates your monthly repayments. It’s more complex compared to simple interest but the idea is the same. An interest rate is the percentage of the amount you borrow.
- Factor rate
Unlike the interest rate that is expressed as a percentage, factor rate is in decimal form. It’s mostly used in cash advances and short-term loans. If for example, you are borrowing a loan of $20,000 at a factor rate of 1.35, you’ll just multiply 20,000 by 1.35 to get that you will repay a total of $27,000. It’s often used in more expensive and riskier loans.
- Annual percentage rate (APR)
While interest is simply the cost of borrowing, APR is all-inclusive.
It factors in interest rate and all the associated fees and costs associated with a business loan.
It gives a true picture of how costly or cheap your loan is. Ensure that you know the APR upfront before signing the loan agreement form.
You can use this number to compare the different loan offers to make an informed decision.
Other fees that will affect the cost of your business loan rate
These are the extra charges on top of the loan interest rate that your lender charges when you apply for funding.
- Origination fees
Think of them as basic upfront administrative costs.
The numerous phone calls, emails, interviews and background checks done before approving your loan request takes time. Lenders recoup the money and time spent during the verification stage by charging an origination fee.
It’s expressed as a percentage of the amount you are borrowing.
- Guarantee fee
The small business administration SBA is a government agency that does not offer loans but guarantees small business owners to lenders in a bid to reduce lending risk.
To get SBA loans for your business, you’ll have to pay a minimum guarantee fee of 0.25% and a maximum of 3.75% of the amount you want to borrow.
- Processing/underwriting fee
This is the amount lenders charge for the time and energy spent in reviewing and approving your loan request.
It can be as high as 5%.
- Check processing fee
If you choose to be paid or repay your loan using the check system, be prepared to pay for the processing.
Processing a check takes time and lenders in most cases throw the charge to the borrower.
- Late payment fees
You are likely to pay extra when you repay your loan late. To avoid paying extra and incurring more costs, make sure you submit your monthly payments on time.
- Prepayment penalty
If you decide to repay your loan before the agreed date, be prepared to pay a penalty. Usually, lenders expect a profit on every dollar they lend out. Paying upfront will deny them the expected gain.
They will, therefore, expect you to still pay the full interest or 3%-5% of the loan’s principal. It varies from lender to lenders and some may not even charge you.
Factors affecting your small business loan rate
Lenders take various factors into consideration when setting the lending rate.
Some of the most common factors they look at are:
- Your personal or business credit scores
A good credit score shows lenders that you’re a responsible borrower. With a personal credit score of above 700, you’ll qualify for a lower interest rate and better repayment terms.
When approving borrowers for funding, lenders put a lot of emphasis on their credit scores because it indicates how risky or less risky they are. If your credit ratings are good, lenders will charge you less because they are confident that you’ll repay your loan in full and on time. Bad credit, on the other hand, will attract high loan rates because lenders will want to recoup their money quickly because they are not certain if you’ll repay your loan. Your business credit score also depends on your previous debt and business credit cards repayment history. It’s, however, not as important as your personal credit when taking out business loans.
- Transaction history
How long have you been in business? Lenders believe that businesses that have been in operation for say, 2 years and longer are more stable than startups. In deciding how much to charge as interest, lenders will charge startups more compared to established businesses.
The argument is that a startup may fail to pick up and therefore lose the amount borrowed out.
- Annual revenue
How much does your business make? The more the better. It indicates that your business is stable and profitable. Lenders are more confident that you’ll repay your loan if your venture is profitable. They’ll charge you less if your annual revenue is attractive.
- Loan term
The longer the term, the more interest it will accrue. Short term loans have a higher APR but the interest rates are a bit low because you tend to pay them faster. Short term loans are ideal because you’ll pay less, but if you have huge business projects, a long-term loan will suit you best.
- Type of lender
While conventional lenders shy away from risky borrowers and will to do several background checks on borrowers before approving their loan requests, online lenders are more flexible and lenient and may not do a lot of verification.
They, however, will charge more to cover the risk. To avoid paying more as interest, improve your credit scores and be eligible for bank loans.
- The business industry
Lenders will set interest rate depending on how risky or less risky your business industry is.
If you are offering fast moving products and services, lenders are more certain that you’ll pay up your loan because your cash inflows are stable. They will, therefore, charge you less compared to a business that has several service providers and is so dynamic. We are here to make your small business loan search less daunting. Contact us by filling out our online loan application form and get connected with reputable lenders and get the funding you so much desire.