Whether you’re still in the idea stage, ready to launch, or on a path to expansion, financing your small business with a loan can give you the boost you need to create a profitable business. However, before you sign any loan agreements, it’s critical that you understand exactly what you’re signing up for – and that means knowing what’s included in your overall small business loan cost.
In this overview, you’ll learn the key numbers you need to understand to ensure you get a loan that supports your dreams today and helps you achieve your long-term goals.
What’s included in your total business loan cost?
When looking for any loan, the focus is typically on the interest rate associated with each type of loan. Interest rates can significantly affect the amount of money you need to pay each month to pay off your debt.
However, interest rates are only one piece of the loan puzzle, and to get funding that works best for you, you need to put all the pieces together to ensure you’ve got the best result. Other key numbers are:
- Loan fees and additional costs for things like business or equipment appraisals, environmental site evaluations, and others
- The loan term, which is the amount of time that you have to repay a loan
- How often you’ll need to make payments, and how often interest builds on the loan
- Credit scores and value of available collateral
Let’s look at each of these factors and see how they can impact your small business loan cost.
How do interest rates impact your business loan cost?
Simply stated, interest is the cost of borrowing funds. Whether you borrow from a bank, a credit union, or an alternative lender, you’ll likely have to pay interest on your loan. You’ll either have a:
- Fixed interest rate: This means that the interest rate you receive when you sign your loan documents will stay the same throughout the repayment period. This is great when rates are lower and you can lock in a beneficial rate. It also makes it easy to budget for payments, because they’ll stay the same over the entire repayment period.
If you signed your loan paperwork and, over time, rates go down, then you may want to refinance your loan. However, it’s important to know that refinancing doesn’t always lower your payments or reduce your repayment period. There are also often fees associated with refinancing. You’ll want to work out the numbers with your lender or accountant to determine if refinancing is worth it.
- Variable interest rate: This type of interest rate changes over time, along with changes in market-based rates. That means your rate when you sign your loan paperwork can go up or down over your repayment period. Although this can help when rates go down, it can also mean paying more if rates go up. This can also make budgeting harder because your payment may change each month.
Some lenders will offer special “introductory” rates, which can be much lower for the first several months or even a year – and then the interest rates increase. If you’re not prepared for the bump, it can create financial hardship.
When looking at small business loan costs, especially for a loan you’ll be repaying over several years, it’s usually better to go with a fixed-rate loan, even if the rate is slightly higher. Its predictability and stability make it easier to manage without negative surprises.
Another important factor regarding interest rates is how frequently they compound. Some examples include daily, weekly, or monthly, which can significantly affect the total amount you’ll pay.
What are the business loan fees you’ll need to pay?
Most small business loans will have at least one type of fee and, often, several. It’s important to know that required business loan fees can vary between lenders, so when looking at your overall small business loan cost, ask potential lenders for their fee schedule. This can help you determine the best loan for you and your needs.
- Loan-specific fees: Depending on the loan, specific program-related fees may vary. For example, a guarantee fee for Small Business Administration (SBA) loans or program fees for state-run programs. You can use an SBA 7(a) loan guarantee calculator to determine how much this would cost on your loan.
- Upfront loan fees: Loan fees that may be charged up front can include application fees and origination or commitment fees. These help a lender cover costs to offer potential loans, regardless of your approval. You’ll often pay these at the time of the application.
- Fees during the application process: Sometimes, steps are required for your lender to make a more informed decision about your loan, such as a building appraisal you want to purchase for your business or an environmental site assessment. These are fees you pay and may be eligible to be rolled into the closing costs, but if not, you may need to pay upfront. Depending on the fee, it can run anywhere from a few hundred to several thousand dollars.
- Fees at closing: When you’re approved for a loan, there is a process, called “closing,” where you’ll sign all the documents, and some or all funds will be distributed. At this point, any fees that haven’t been paid are either paid fully by you, subtracted from the loan funds, or are “rolled” into the overall loan costs, along with the principal and interest, and paid over time as a fraction of each payment you make on the loan.
- Fees after closing on your loan: After the closing process is complete, you may never pay another fee for your loans. However, sometimes there are circumstances where you may need to pay additional fees. These can include a prepayment fee (required by some lenders if you pay the loan off early) and late-payment fees (a penalty for making a payment beyond the due date). Some lenders will also charge an ongoing service fee. In addition, fees will be associated if you decide to refinance later.
When you first meet with a lender, ask for a list of the types of loan fees and costs required for your type of project. That way, you can be better prepared if and when you need funds in advance; you’ll have a better sense of how fees that are rolled into your loan will impact your overall repayment amount; and you’ll know whether your lender expects you to pay prepayment penalties or servicing fees.
How do loan terms and repayments impact your loan?
When exploring loan options, another important factor is your loan term—how long you have to repay your loan. You want your loan term to be long enough so the repayment amount is easy to manage, but not so long that you’re paying excessive interest. Often, a lender will determine the loan term based on the amount, the perceived risk involved, and the loan type.
You also need to pay attention to how often repayment must be made—while most loans are repaid monthly, some lenders may require weekly or even daily payments, which can be very difficult to manage.
Before you sign with a lender, find out what the total cost of the loan would be, then try an online calculator to find out how different loan terms could work best for you. If the result is different than what your lender proposed, see if you can negotiate to get the best term for your business.
How creditworthiness and collateral affect your business loan cost
Several factors impact the interest rate you’re offered – and creditworthiness and collateral are among the most significant.
- Creditworthiness: Your creditworthiness is determined by your credit report and history, and from a lender’s perspective, it is one of the most important considerations. This is because your entire credit picture – how you’ve handled past debts, how much debt you have, your ability to take on new debts, and more – will be a deciding factor in your loan approval and can impact the interest rate you’re offered. The better your creditworthiness, the better your interest rate.
- Collateral: Another factor that can impact your interest rate is whether collateral is available to secure a loan – if you don’t pay the loan as agreed, your lender can claim the pledged collateral. For example, a home loan has better interest rates than a credit card because a mortgage is secured by the purchased house. A lender may also require you to pledge personal collateral, such as a home or car, to secure a loan.
Before you apply for a loan, review your credit history and score – the better the overall picture, the better the loans you can secure. Be sure the information is accurate and that you resolve any outstanding issues.
Not all loans require collateral, so ask potential lenders about your specific case. If you need to offer personal property, such as a home, be sure you understand the full implications of this. Also, know that there are some excellent small business loans that may not require collateral, so talk to your lender to find out all of your options.
Pursuit has small business loans that help your business grow and thrive
When you work with Pursuit, we value transparency at every step, and we ensure that you understand your small business loan cost so that you feel comfortable that the loan will support your goals.
With loans from $10,000 to $5.5 million, we have financing for working capital, equipment, the purchase or construction of commercial real estate, to refinance business debt, and more for businesses in the areas we serve.
Apply today to take your business higher!