When you shop for business loans, you typically decide between lenders with how much you can borrow and what the rates will be. And like any rational person, you’d want to get the best deal as much as possible.
So, most likely, the reason you’re here is that you’re looking for a guide to get the most favorable interest rates in the market. Well, count yourself lucky as this article will help you with just that plus a lot more. Hopefully, after reading this, you’ll be able to find the lender that’ll get you the lowest rates on your loan.
As you know, interest rates are the extra amount you have to pay for your loan and are usually derived from a percentage of the total sum you borrowed. It is often termed as the cost of borrowing money.
Now, this percentage will vary, and the exact rate you’ll get for your loan depends on the lender, business loan type, your credit factors, and of course, your business’s age and earnings.
To give you an idea, the current interest rates for a small business loan are about 3% to 7%, according to ValuePenguin. So, if you borrowed $100,000 with a 3% interest rate, this means that the cost of your loan is $3,000.
As we mentioned, rates depend on several factors. Look at online lenders. You’ll find that the average annual interest rate of these unconventional lenders ranges from 13.00% to 71.00%, which is vastly different from the 3% to 7% average.
The same goes for the business loan type. For instance, borrowing from peer-to-peer lending marketplace Funding Circle gets you a minimum of 4.99% Annual Percentage Rate (APR). If you don’t know what an APR is, it is just the figure that comprises all the credit costs, including the interest rates we talked about and other fees.
Of course, there is also the product type that influences interest rates. Business loans are actually very broad: it’s an umbrella term for other types of credit products. One such example is a line of credit, which is like credit cards that let you borrow open-endedly. Lines of credit can have as low as a 2.58% rate and as high as 80%.
But, overall, the best rates available are found with bank loans, and it falls anywhere between 2.58% to 7.16%. And among online lenders, the one that offers the lowest rates is Balboa Capital, with a 3% to 30% rate range.
So as you can see, there is no one rate for every business loan, and take note that your credit score and history aren’t factored in yet. These are only the baseline figures, and the ultimate rates you’ll get will be disclosed to you after you apply and gain pre-approval.
Like business loans, interest rates are also a broad category, and it classifies into different types as well. It can include compounding rates, variable, fixed, discount rate, prime rate, etc.
In truth, some of those terms belong to the everyday language of investing, so for this article, we’ll concentrate only on what matters most in deciding on business loans, and those are variable rates, fixed rates, and APR.
As its name implies, this type of rate is not fixed, meaning that the amount you could pay as time goes on is unpredictable. You may wonder how you can benefit if there’s a likelihood that your payments increase as time goes by. And the answer is promotional rates. Some lenders offer very low introductory rates that make initial payments towards your balance minimal.
Also, with variable rate loans, lenders are more willing to dispense higher amounts because they no longer have to assume interest rate risk. For instance, when interest rates go up, and your loan is fixed at a much lower rate, the lender loses out on the opportunity to charge more.
Fixed rates are often the more favored rate structure because it stays the same throughout the life of the loan, thereby making it more predictable. This makes it much easier for borrowers to budget or plan ahead since they know precisely how much they need to pay.
We’ve already touched on APRs, but we haven’t mentioned what other costs comprise it. APR consists of all the charges related to the loan product, like origination fees, discount points, and others. The APR encompasses all of this and provides a more comprehensive figure of what the loan will cost.
In most cases, yes, a startup loan will likely have higher rates than what most older businesses would get for the same loan type. And the reason why is obvious if you look at it from the lender’s perspective.
Startups usually have a higher rate of failure than a more established business, making lenders feel skeptical about lending them money, let alone offer them the most favorable rates. And if ever a lender approves a loan for a startup, it raises rates as a way to compensate for the extra risk.
Conversely, businesses that have been in operations for a more extended period will allow lenders to have more manageable expectations.
As mentioned, bank loans are the lenders with the lowest interest rates on business loans, but they are perhaps the least convenient option, not to mention the slowest.
Online lenders tend to be the better choice if you want the funds right away with less hassle. But what are the best rates for online lenders?
We named Balboa Capital the one with the lowest rates at 3% to 30%. This lender can offer up to $250,000 for small business funding. However, it’s not one of the highest-rated among customers.
A worthy alternate option is Big Think Capital. This New York-based lender has a high trust rating among customers and offers competitive rates as well, 7% to 30%. Fintech company BlueVine Capital also has an excellent rating and a solid product range, but its rates are much higher at 15% to 78%.
There’s a reason why most lenders quote their APR using ranges. Because apart from rates varying between lenders and loan options, your business’s age and earnings, as well as your credit profile, will greatly determine what rates will ultimately be attached to your loan.
Your business should meet most of the lender’s earnings requirement, which is generally $100,000 yearly among online lenders and $250,000 among banks, while the minimum age of your business must be between six months and two years.
Then, your credit profile is determined by a credit score of at least 600 among most online lenders and an average of 680 for the traditional ones.
If you manage to meet these requirements satisfactorily, there is a good chance that you can secure a loan with an interest rate in the low end of the lender’s interest rate range.
The advantages of getting low rates for your business loan will always far outweigh the cons. For example, if you manage to get a low cost for borrowing money, it will be a big help for your cash flow, giving you more of your business's income to work with. Low rates will also make your loan easier to pay, which would then lead you to a better credit score and afford you higher loan amounts and possibly even more attractive rates.
The disadvantage, however, is when you somehow, through unavoidable circumstances, accumulate debt and the financial solution it left you with is a debt consolidation loan. In this case, it could be difficult for you to find another loan with a lower rate, especially since the multiple debts you've obtained could have pulled down your credit score.
That depends on the loan type and the lender. An SBA loan (small business loan), for instance, can be between 5 to 25 years, while a short-term loan offered by online lenders can be from a minimum of 3 months up to 24 months. It’s best to consult with your lender about the typical terms they offer on their products.
A term loan is usually the common choice among borrowers, and this is because it sets a fixed repayment schedule with the option for variable or fixed interest rates. This makes it much easier for borrowers to manage payments. However, this option is often limited to those with established businesses.
Online lenders have a faster processing time compared to most traditional lenders. Usually, it takes approximately 2 to 3 days for an online lender to process your application and dispense your funds.
On average, lenders need your business to be at least two years old for you to borrow money, but some approve an applicant whose business is only three months old, provided that other requirements are met.
Taking out any loan is a commitment. It would be a good idea if the business’s operations can cover repayments in the long run and that the financial boost is geared towards something that will improve results.