All you need to know about business loan rates 2018
Many business owners apply for loans to meet their long-term and pressing business needs. To ensure that you get the best loan product, there are several things that you should first bear in mind. This includes the amount of funds you need and how long it will take for the loan to be fully repaid. It is also important to know the interest rate and fees associated with the loan. There is no denying in the fact that business loans come with a lot of benefits for small business owners, but if you do not take time to find the best product, you may find yourself paying more in form of fees and penalties.
If you happen to compare the current business loan rates to the rates in the past ten years, you will notice a huge difference. After the great recession, banks, which were the primary source of funding to small business owners tightened their lending requirements. This made it difficult for business owners to access traditional bank loans. Alternative lenders, on the other hand, took this opportunity to offer easy business loans with fast approval rate. This came as a relief to small business owners, but the loans also attracted higher rates of interest compared to traditional bank loans.
Types of business loan rates
An interest rate is the extra amount you pay on top of what you borrowed from a lender. Lenders charge interest rates to make profits out of the money they lend. Generally, the riskier you are the higher interest rate you will be charged.
- Simple and compound interest rates
When calculating simple interest, the principal amount, yearly interest rate and loan term are considered. Compound interest rate calculation is a bit complicated, your repayment is compounded based on monthly payments. Whatever the option that your lender may use, interest rates are simply a percentage of the amount you borrow.
- Annual percentage rate
When calculating annual percentage rate, the loan interest rate is combined with other fee charges associated with the loan. This will give you a clear picture of the total cost of the loan.
- Factor rate
Factor rates are used in most short-term loans, including merchant cash advances. While interest rate is in form of a percentage, factor rates are in decimal form. It is also easier to deal with factor rates- you only need to multiply the factor rate by the loan amount to know the total amount that you will have to pay back.
Comparing business loans rates from different lenders
The average business loan rates vary depending on a number of factors. These include the borrower’s qualifications, the lender you work with and the type of loan you are applying for. For instance, traditional lending institutions offer loans with the lowest APR of between 4% and 13%. But to qualify for the loan, you need to have good credit and be in business few at least 2 years. The loans also have minimum revenue requirements. If you do not meet these qualifications, then there are fewer chances that you will qualify for a traditional bank business loan. Luckily, there are several other lending options that you can consider. These include;
- SBA loans
Small Business Administration, SBA provides 3 main types of loans to small business owners; SBA 7A, CDC/504 and SBA Express loans. You can use SBA 7A loans for different business needs like purchase of inventory, debt consolidation and business expansion among other uses. On the other hand, CDC/504 loans are specifically used to purchase fixed assets like heavy machinery or real estate. The current SBA 7A loan rates range from 7.50% to 10% while part of the CDC/504 loans that is provided by a participating partner has a rate of between 5.04% and 5.25%.
- Alternative Lenders
Alternative or online lenders offer loans with higher rates of interest compared to banks and SBA loans. This is because unlike banks, the approval process is much faster. In fact, it can take as soon as 24 hours for the funds to be wired to your bank account. Alternative lenders also do not have tight requirements for the loan to be approved. Since the loans are easy to qualify, they tend to be more attractive compared to traditional bank loans. But this also comes at a cost. The fact that you can easily qualify for the loan even when you do not have good credit or have been in business for only short period of time puts lenders in a high-risk situation and this eventually increases the interest rates charged.
Interest rates by loan product
Another factor that can affect business loan interest rates is the type of loan you are applying for. Alternative products like invoice factoring, merchant cash advance and short-term loans tend to have higher rates of interest compared to long-term borrowing options. What makes these types of loans attractive is that the approval process takes only a few days, making them a good option if you have urgent business issues to meet.
Other factors that may affect small business loan rates
Besides the above factors, both your personal and business credit score may be evaluated during the loan application process. Lenders will first want to find out if you are able to repay the loan on time and whether the loan is business or personal related. Some lenders also have credit score minimum requirements, which vary from one lender to another. For instance, bank loans require a FICO score of at least 680 to qualify for funding. There are also alternative lenders who offer loans to borrowers with credit scores of as low as 500. It is, however, important to note that the lower the credit score the higher the interest rate will be.
Besides the credit score, lenders will also consider your time in business, minimum annual revenue and current and projected business finances. There are also other requirements like cash flow and business profitability which are less common, but you should be prepared to provide relevant documentation in case they are required by the lender. You also have to explain how you intend to use the loan and how these funds will benefit your business in the long run.
Additional fees that may impact interest rates
Besides the interest rates, lenders also charge other fees when offering a business loan. These fees vary depending on the lender you work with and the type of loan you are applying for. They include:
- Origination fee
This fee is usually a percentage of the total amount you borrow. Lenders charge an origination fee to cover the basic upfront administration costs. The process of reviewing and approving your loan takes time and efforts. Origination fee is simply a compensation for the time taken by the lender to review and approve your loan.
- Processing fee
Once you apply for a loan, the lender will go through different processes before providing the funds. These processes, which includes customer service or billing also comes at a cost. A processing fee is charged as compensation for these expenses.
- Prepayment penalties
Some lenders charge prepayment penalties if you decide to pay off the loan before it is due. It acts as compensation to the lender for the interest rates lost when you pay the loan early.
- SBA guarantee fee
This fee is charged to small business owners who apply for SBA loans. (SBA guarantees up to 85% of the total loan amount). Guarantee fees depend on the amount guaranteed by SBA and the repayment term. This fee is only charged for loans above $150,000.
- Late payment fee
The fee is charged when the borrower makes payments past due date. It can be a flat fee of $10-35 or 2-5% of the outstanding loan amount.
The bottom line
As you may be aware by now, small business loan rates depend on many different factors. If you have been in business for a longer period, have good credit and your business generates high annual revenues, you can easily qualify for business loans with low rates of interest. But this does not mean that startups with no credit history cannot qualify for affordable loans. By comparing different lenders, you can be lucky enough to find a loan product with affordable rates of interest. There are also lenders who do not consider your business history to approve the loan. Provided you have good personal credit and you can prove that your business is profitable enough to repay the loan, there is no doubt that you will find a lender who offers the best small business loans at convenient rates.