What Will You Be Charged? – Forbes Advisor

Average Business Loan Rates: What Will You Be Charged?
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Getting a business loan can help take your business to the next level if you do it right. One way to ensure you get the best deal is to secure the lowest interest rate. We’ll help you demystify business loan interest rates in this article so you can get the best possible loan for your business.

What is the interest rate on a business loan?

Unfortunately, lenders do not offer loans for free – they make money by charging borrowers interest and fees. Interest is the amount of money, represented by a percentage, that lenders charge you to borrow money from.

When you take out a small business loan, the total interest you pay is determined by multiplying the total loan amount, or your principal, by the approved interest rate. You will pay back the principal and interest over the term of the loan.

Because of amortization – which is the process of scheduling a fixed-rate loan into equal payments – you will pay the same payment for the life of the loan, with the first part of the payment converted to interest and the remaining amount paid against the amount owed on the principal of the loan. More of each payment goes toward principal and less toward interest until the loan is paid off.

interest rate vs. April

It’s easy to confuse the interest rate with the APR on a business loan. While they measure the same thing – the cost of borrowing – they have their differences.

The interest rate is the amount of money it would cost you to borrow it from a lender, usually expressed as an annual rate. On the other hand, the APR measures the total cost of borrowing, including fees, such as construction fees. Since the APR also includes fees in addition to interest, this number will be higher.

When it comes to shopping for business loans, it’s usually best to compare APRs because they include all the fees you’ll be responsible for, while the interest rate doesn’t. After all, a business loan may have a low interest rate, but if fees accrue to it, it may not actually be the most affordable loan.

Related: Business Loan Calculator: Estimate Your Payments

What factors affect business loan rates?

Interest rates on commercial loans can vary greatly. Getting the best loan rate now can affect your profitability later. Pay attention to these factors.

  • Business credit score: Companies have their own credit scores, just like people. Lenders usually use this as a way to measure the creditworthiness of your business.
  • Personal credit score: Lenders also consider your personal credit score. Your financial habits can give some indication of how you are running your business and handling your money.
  • working time: New businesses are riskier to lend than existing businesses. Most lenders want to know that you’ve been in business for at least a year or two, depending on the type of loan.
  • industry: Some industries are more dangerous than others, such as restaurants. Riskier industries usually lead to higher interest rates.
  • loan term: Most of the time, commercial loans with a longer term have the lowest interest rates. This means that lenders often charge higher interest rates on short-term business loans.
  • side: If you provide some kind of collateral to secure and support your loan, such as business equipment or a savings account, many lenders are willing to give you a better rate on your loan. Undertaking collateral reduces the risk they pose to the lender because it gives them something of value to repossess if you fail to pay your debts.
  • Loan type: Some loan programs, such as Small Business Administration (SBA) loans, are known for their low costs. Loans from alternative small commercial lenders may come in at very high rates.

Not all of these factors are under your control. For example, you can’t control how long your business has been on – you can just wait. However, knowing these factors helps you determine if your business is in the best position to qualify for an appropriate interest rate.

Average interest rates by business loan type

Depending on your business needs, there are different types of business loans that you can choose from. Each type has varying ranges of interest rates. Here’s what you can expect to pay in interest for each type of business loan:

How to compare business loan rates

Once you have decided what type of business loan you need, pre-qualify and check your rate with as many lenders as possible. Specifically, be sure to get the APR from each lender to understand the total cost of the loan. Most lenders that offer a pre-qualification process will only do a flexible credit check, which has no negative impact on your credit score. Pre-qualification allows you to see the price and terms you may receive when you place an official order.

Some types of business loans, such as merchant cash advances, use factor rates instead of APRs, and you can compare the cost by this metric instead.

Other business loan fees

In addition to the interest rate, lenders also charge other fees, including:

  • Incorporation fees. This fee covers the administrative work involved in processing and underwriting your loan.
  • SBA guarantee fee. These fees are only on SBA loans and help defray the cost of SBA programs.
  • Prepaid fee. Some lenders charge a fee if you pay off the loan before the term expires.
  • Late payment fees. If you make a late payment, you may have to pay an additional late payment fee.
  • Packaging fees. Some SBA loan lenders charge this fee in addition to the guarantee fee.

Frequently asked questions (FAQs)

What is the difference between fixed and variable business loan rates?

A fixed rate loan has an interest rate that remains fixed until you repay the loan, while a variable interest rate may change. Variable rate commercial loans usually have a lower interest rate to start, but because it can change, the payment amount and the total interest you pay can change over time as well.

How do you qualify for a low interest rate business loan?

Lenders consider many different factors when determining the interest rate you will be charged. Doing business for more than two years and having good personal and business credit scores can help you qualify for the lowest business loan rates.

What is a good interest rate for a small business loan?

Interest rate ranges vary widely depending on the specific loan. For example, traditional bank loan rates usually range from 2% to 13% while online loan rates can go as high as 100%. Ideally, and if possible, you want to lock in a rate of less than 10%.

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