Finding the best small business loan rates 2019
When looking for a loan product for your business, there are some very important questions that you first need to ask yourself: what is the maximum amount of loan you need? How much will it cost? When will it take to fully repay the debt? There is also this one question that most business owners need to ask before signing the contract:
What is the interest rate of the loan?
The current rates for business loans are completely different from the rates in the last 10 years. After the great recession, the main source of business loans, which were banks at that time tightened their lending requirements. This is where alternative lenders came in to provide loans with more flexible requirements for small business owners. But they also did this at a cost. This means that the current small business loan rates are relatively higher compared to rates before the recession. A business loan offer may sound to be a good deal, and especially when you have pressing business issues. But it is also important to ensure that there are no hidden costs, fees, and penalties associated with the loan.
Factors determining business loan rates
Small business loans come with different rates of interest, and the cost of borrowing may differ depending on the lender. This is because businesses applying for a loan have different needs, some of which may be required to be attended to immediately. If you do not meet all the lender’s qualifications, you may also be a charged a higher rate of interest. Market trends and the loan type you want to apply for also determine the interest rate that you will be charged. For instance, unsecured business loans tend to have higher rates than secured loans. Other factors that determine small business loan interest rates include:
- Personal credit score
Your individual credit score will not only determine the type of loan product you are eligible for, but it will also have an impact on the interest rate that you will be charged. Generally, business owners with good credit score of more than 700 can easily qualify for low interest rates. One advantage of having a good credit rating is that lenders will see you as a responsible borrower, and they will be confident that the loan will be repaid on time. If you are trusted by a lender, you won’t be charged extraordinary rates. On the other hand, poor credit borrowers may have limited options available. This is because lenders will see you as a high-risk borrower and this can lead to high interest charges.
- Period in business
How long you have been in business also determine the rate of interest that lenders will charge in the long run. Startups are regarded as risky ventures and they may pay higher rates compared to more established businesses.
- The business financials
If your business is doing well financially, you may also get a loan product at affordable rates. Your annual revenue and business profitability are some of the factors that determine how much interest you will be charged. Some lenders require you to generate a certain amount of annual revenue to qualify for funding. If your business generates more than the minimum revenue requirements, you can easily qualify for a loan with lower interest rates.
- Loan repayment term
If you need a loan to meet immediate business needs, short-term loans can be a good option for you. This is because it only takes a few days to be approved and you can have the money in your bank account within 24 hours. The loans also have a term of 3-18 months, meaning that if you pay the loan on time, the rate of interest will be lower. This is actually the opposite when it comes to long-term loans. Some term loans have a length of up to 20 years and as much as your monthly payments may be lower, you may end up paying more interest.
- Your business industry
The riskier your industry is the more rate of interest you will be charged. The restaurant industry for instance records a high failure rate, which means that they are charged higher compared to other industries like retail and manufacturing.
Most affordable to least affordable loans 2018
With the number of options for loans available for business owners, determining how much each of them costs can be an overwhelming task. If your business has been in operation for quite a long period, have a good credit score and generate an above average annual revenue, you obviously will want to start with the most affordable options. These include:
- Bank loans
One benefit of traditional bank loans is that the rates of interest can be as low as 4%. The only problem is qualifying for them and even if you are approved, there is much documentation required. Besides, you will have to wait for weeks to get the funds. If you do not have any pressing business need and you are ready to handle the paperwork, then bank loans can be an option that is good for you.
- SBA loans
Since the government guarantees a portion of the loan, it is easier for small business owners to qualify for this funding option. There are several types of SBA loans available to small business owners; these include SBA 7A loans, CDC/504 loans, equipment loans, disaster loans, and microloans. All these types of SBA loans have different requirements and the rates of interests also vary. Generally, SBA loans attract interest rates of between 7.25-10%. But just like traditional financial institution loans, it is not easy to qualify for SBA loans.
On the other hand, loans that are easy to qualify for tend to be more expensive. They can be a good option for small business owners who don’t qualify for affordable loans. These include:
- Merchant cash advances
With this option, the business is offered an amount of money that needs to be paid with a percentage of daily credit card receipts. It can be easier to qualify for a merchant cash advance, but they may also affect your business cash flow.
- Short term loans
Most lenders offer short-term loans with a term of between 3 and 18 months. It is also easier to qualify for short-term loans compared to SBA and bank loans. However, the rates of interest are charged according to the borrower’s credit history and business revenue.
Additional fee charges that may affect small business loan rates
When calculating how much a certain loan product will cost, do not only focus on the principal amount and rate of interest. Banks loans, for instance, come with different other charges which can also increase the cost of borrowing. Besides the loan interest rate, other fee charges that you can come across when taking out a loan include:
- Application fee
This fee is charged for processing the loan application. The fee is nonrefundable even when your loan is not approved.
- Guarantee fee
Other loan options, like SBA, also attract a guarantee fee. A lender who is chosen to participate in the SBA loan program is charged the fee and in turn passes it to the borrower. This fee depends on the amount of loan guaranteed by SBA and the loan maturity. The fee ranges between 0.25 and 3.75.
- Origination fee
This fee is charged as compensation for the time and effort taken by the lender to approve your loan. Origination fee ranges from 1-9% and is usually deducted from your loan amount.
- Processing fee
This fee is charged for the process of reviewing and approving your loan. The fee can go up to 5% of the total loan cost.
- Service fee
Once your loan is approved, the lender will still have the task of collecting payment and providing customer service, which also requires time and effort. Some lenders also charge a fee for these services.
- Prepayment fee
This fee is charged when you decide to pay the loan before it’s due. Not all lenders charge prepayment fees, which act as compensation for the interest they lose when you opt to pay off the loan early. This fee ranges between 3-5%.
Finding loans with the best rates of interest
One of the ways to ensure that you get an affordable loan is by comparing products from different lenders. Even if you have less-than-stellar credit, it doesn’t mean that you won’t qualify for any loan option. In the end, rates of interest depend on several factors and lenders will always want to fund your business, since that’s their main business. If you take some time to compare loans from different lenders, you can easily find one who offers good rates.