Lenders make money by charging interest on their loans. The amount of interest that they charge can vary significantly from business to business, much as it can when people apply for loans. Since the rates vary so much, it’s important for business owners to know how much they can expect to spend.
Business owners should also know what they can do to lower interest rates on the loans they need to keep their companies growing.
The Lender You Choose Matters a Lot
If you get a business loan from a bank or credit union, you can expect to pay from 6% to 8% in interest. The type of lender that you choose, however, matters a lot when it comes to interest rates. For instance, if you get an SBA guaranteed loan through a bank, you can expect to pay about 3%. If you have exceptional credit and you don’t need much money, an SBA loan could charge as little as 2.5%.
Interest rates can grow considerably when you turn to non-traditional lenders. Pawn shops and payday lenders may charge nearly 30%. Laws dictating how much these businesses can charge vary from state to state, so the amount that you pay could depend on where your business is located.
There are low-interest options available for practically all responsible small businesses. If you have to use a high-interest lender, you might want to reconsider whether you should get a loan at all. The interest payments alone could make it difficult for your company to turn a profit.
Your Business’s Credit Rating Affects Loan Interest Rates
Your business’s credit rating plays a hefty role in how much interest lenders will charge. A business with stellar credit might only pay 5% on a loan. Since lenders don’t see you as a risk, they don’t mind charging low interest rates. That’s one of the perks of making responsible financial decisions.
If your business has poor credit, you can expect to pay up to 10%. Instead of taking the loan, you may want to spend some time repairing your credit so you qualify for a lower interest rate.
A Few More Points Will Add Up Quickly
The difference between 5% and 10% may not sound like a lot. After doing some math, though, it becomes obvious that a few points can add up quickly. Let’s say you borrow $5,000 on a five-year loan that charges 5% interest. Your business will repay less than $100 per month for five years. By the time you repay the full amount, you will have given the lender about $650 in interest.
Now, let’s say you borrow the same amount from a lender that charges 10%. With this arrangement, you’ll only pay about $10 more per month, but your overall interest comes to about $1,360. That’s double the amount that you spend on the 5% loan.
Interest rates become even more important when you borrow larger amounts of money. There are several online calculators that will help you determine how much money your small business loan really costs.
Interest rates vary according to several factors. If you want to lower your interest rate, focus on reducing your debt, writing a strong business plan, and establishing a surefire way to increase your business’s profits. It also pays to shop around. Just because one lender wants to charge 10% doesn’t mean that you can’t get a much better deal from another institution.