Business Loan Rates: What You Need to Know | Behalf
Business Loan Rates: What You Need to Know
Picking a business loan to finance your small business is not easy. If you’re like many small business owners, you didn’t major in accounting. Yet, your business still experiences the occasional cash flow gap and somebody (you) has to deal with it. Business loans seem like a simple option, but keeping track of the different business loan rates and fees while you shop around can be overwhelming. Don’t let the financial jargon scare you off. It is important that you make an informed business decision, whether you choose to finance with a business loan or not.
One of the biggest challenges you face shopping for a business loan is understanding the business loan rates. At the end of the day, a business loan is a lump sum of money that you must pay back along with the associated business loan rates and fees. When you get a business loan, the amount you borrowed may look very different than the amount you eventually pay back. Prepare and plan for your business loan, by learning the total cost of financing and what factors into it. This article will focus on what you need to know about business loan rates so that you can choose the business loan that is most beneficial to your small business.
Interest Rates: Fixed or Variable
The interest rate is a major component of a business loan’s total expense. It is the amount the lender charges you for borrowing the business loan. You will run into fixed or variable interest rates. A business loan with a fixed interest rate will cost the same amount monthly over the life of the loan. In other words, there are no surprises. If you are looking for business loan rates that are predictable so you can plan and budget accordingly, choose a business loan with a fixed interest rate. On the other hand, variable interest rates fluctuate. These types of loans may be able to offer you a much lower interest rate early on – as either an introductory promotion or due to current economic conditions – but can end up costing more in the end. A variable interest rate business loan makes budgeting a challenge, but the challenge and risk may be worth it if the lower interest rate at the onset is truly compelling. You must decide which type of interest rate is best for you, based on how/when you intend on paying off your business loan.
Annual Percentage Rate (APR)
Often mistaken for the interest rate, the annual percentage rate is a more comprehensive way of articulating the business loan rate. It can include the interest rate, closing costs, and other fees that you incur while borrowing the loan. At the same time, the APR calculation is not completely regulated, and therefore not always consistently calculated across lenders. Predatory lenders can include certain fees in the APR, while leaving out others to distort the cost of the loan. Ask lenders for a breakdown of their APR, so you know specifically what you are paying for. The APR is also different from an interest rate because it is measured annually, while the interest rate is monthly. Keep this in mind, when you plan and budget your business loan because time will play a major role. There are multiple short term loan products on the market that charge you a higher APR for a shorter period of time, decreasing your total cost of financing. It can often save you money to choose a more disciplined pay off schedule, even if the APR is higher than the alternative evergreen loan product.
What can affect business loan rates?
Lenders set their own business loan rates. Their decision is based on many factors, not just the size and duration of the loan. Your creditworthiness plays a decisive role in how low or high lenders set your business loan rates. Look at it from your lender’s perspective. They incur risk when they lend money to your business. They charge business loan rates on top of the amount you borrow to protect themselves from risk. If you demonstrate high creditworthiness, they will set lower business loan rates because you are more likely to pay them back. The lower the risk, the lower the business loan rates and vice versa. If you do not have good personal credit and your business does not have an established credit profile, you should expect to pay a higher business loan rate. There is no way around this.
Now you have a fuller understanding of what determines business loan rates. Business loans are critical sources of capital for any business of any size. They fund strategic projects, capital investments, and even emergency expenses. That being said, some business loans are a one and done source of income, requiring you to repeat the application process every time you need a new cash injection. If you are looking for ongoing access to business funding, consider a low cost business line of credit. A business line of credit offers flexibility that a business loan cannot. Unlike business loans, the funds from a business line of credit replenish as you pay them and you only pay interest on the amount you use.