For entrepreneurs starting or growing a business, obtaining funds is one of the first critical steps. While business loans are a popular financing option, the interest rates on these loans can vary significantly.
Understanding how interest rates work is an important part of selecting the right loan for your business. In this guide, we’ll highlight the ins-and-outs of business loan interest rates.
How Are Interest Rates Determined?
Business loan interest rates are determined by several factors, including (but not limited to):
- credit score
- annual revenue
- time in business.
Generally, the riskier the borrower is deemed to be, the higher the interest rate.
Interest rates also vary by lender—so it’s important to shop around and compare rates from different lenders before you make a final decision.
Types of Business Loans and Interest Rates
There are different types of business loans, each with its own interest rate structure. Take a look at some of the options available:
Term Loans
Term loans provide borrowers with money upfront in exchange for certain borrowing terms. Term loans are typically meant for established small businesses with good financial history.
These loans have a set interest rate and repayment term. *Rates typically range from 6% to 45%, depending on the lender and borrower’s credit.
*Rates accurate as of July 2023.
SBA Loans
A Small Business Administration (SBA) loan allows financial institutions to provide businesses with loans through more favorable terms than conventional loans. SBA loans encourage banks to provide loans to companies they might not work with otherwise.
These loans may be ideal for small business owners who don’t qualify for a traditional business loan. They have lower interest rates, usually ranging from 10.5% to 16.25%.
Business Lines of Credit
A business line of credit allows a business to borrow an amount of money and will only charge interest on the borrowed amount.
A line of credit is not like a traditional loan, where you’d receive a lump sum of money to be paid back with interest. These loans have variable interest rates, which can be tied to the prime rate or the lender’s cost of funds.
Rates typically range from 8% to 60%.
Bad Credit Business Loans
Bad credit business loans are exactly how they sound: loans that are available to business owners whose personal credit scores are considered bad or fair.
These loans usually have higher interest rates and shorter repayment terms compared to other loans available to people with better credit scores. The interest rates range from 25% to 75%.
Factors That Affect Your Business Loan Interest Rate
As previously mentioned, there are some factors that determine interest rates. The following list includes some of these factors and how they affect interest.
- Credit score: A high credit score generally results in a lower interest rate.
- Business financials: Lenders look at your business’s financials, including revenue, cash flow, and debt-to-income ratio, to assess risk.
- Loan amount: Larger loans may have lower interest rates than smaller loans.
- Loan term: Longer loan terms generally have higher interest rates than shorter terms.
How to Get the Best Interest Rate on a Business Loan
As an up-and-coming entrepreneur, receiving a business loan with a sound interest rate is crucial.
To get the best interest rate on a business loan, consider the following strategies:
1. Build Good Credit
A good credit score could be your saving grace when you’re looking at loan options.
Work to improve your credit score and maintain a strong credit history in order to expand your options to find the best loan for your business.
2. Consider All Options
Before you decide on a loan, compare rates from several lenders to find the best deal.
Don’t jump to a decision too fast—make sure you compare and understand all your options so you make the best choice for your business needs.
3. Prepare Your Financials
Organization and precision is another important factor that can help you get the best outcome.
Ensure that your business has clean financials and a solid business plan to demonstrate your ability to repay the loan.
4. Work With a Financial Expert
Business loan interest rates can be complex, and it’s important to make the best choice as you begin your business.
A skilled financial advisor can help you navigate the process and make sure you have all the resources you need to make the smartest decisions.
What To Do About the Current Slow Lending Rate
With the recent increase in interest rates, many business owners are holding off adding traditional debt (unless it’s absolutely necessary) because of high rates, the recession, and other factors.
However, as we navigate the slow down in lending, it’s worth noting that there are different ways to find alternative funding.
Check out part 2 of this blog where we lay out alternative funding opportunities for small businesses!
Need Help With a Business Loan? HAS Can Help
Business loan interests are a huge thing to consider when applying for a loan, especially as an entrepreneur.
If you’re in the process of applying for a business loan or you need help understanding different interest rates, the financial experts at HAS can be your guide and help answer all your questions! Contact HAS today to get started.
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