When you’re exploring your business loan options, one of the most important (and confusing) aspects is the business loan’s interest rate.
This overview will help break down interest rates, including what types of interest rates there are, why some loans have higher or lower interest rates, and more!
What factors impact interest rates?
There are many factors that go into overall loan approval, but these are the two most significant factors when determining interest rates offered on loans.
Creditworthiness
One of the most important factors is creditworthiness. Lenders consider your business’s past performance, cash flow, and future prospects. They also look at your personal financial history and credit score to get a fuller sense of how you manage debt. Often, the higher your personal and business credit scores, the more favorable the rate.
Collateral
Collateral can be another significant factor. When lenders have access to equipment or real estate, it offers security that they can regain some of the loan debt if your business were to close. That’s why loans secured by commercial real estate tend to have lower interest rates than those that don’t.
What types of interest rates are there?
There are two types of interest rates you can get on a loan; fixed and variable:
- A fixed interest rate stays the same for the life of the loan. This means that regardless of how interest rates are outside of the loan, yours will remain the same. This predictable option allows you to budget your repayment without any surprises.
- A variable interest rate changes over the life of your loan. Throughout the course of your loan, during a set interval, the interest rates are recalculated and can change depending on economic conditions. The rate interval is set by your lender and is most often monthly, quarterly or annually.
Why do small business loans typically have higher rates?
Small business loans are based on the business’s risk profile and its owners. Lenders want to help you, so they work to find the right balance of risk and return.
Think of it this way: When you apply for a residential mortgage, you go through an extensive process, even with the collateral you put toward the loan (your house). Similarly, to get the most beneficial interest rates and terms for your small business, you’ll need to undergo a more extensive underwriting process.
How do interest rates on quick-turnaround online loans compare to SBA loans?
The Small Business Administration (SBA) partners with lenders to create more affordable and accessible loan programs for small business owners. As a result, programs that offer a quick turnaround will most likely have higher interest rates than SBA loans. This is also because, with fast-access loans, lenders perform less due diligence up front, they take on higher risk overall, and the cost of that risk is then passed on to you in the form of higher interest rates.
It’s also not unusual for those loans to have adjustable interest rates, meaning the required payments can increase over time. Still, you should watch out for predatory lenders offering challenging repayment terms and extremely high interest rates.
Why do different loan programs have different interest rates?
There are many loan programs to meet the unique needs of small businesses. Each program has a specific interest rate that reflects its risks and goals.
Some loan programs may offer reduced rates if you’re a veteran-, women- or minority-owned businesses. There may also be reduced-interest options if businesses are located in target “opportunity” zones or rural areas.
It’s important to note that a lower-rate program could have a slower turnaround or a higher dollar amount requirement. A higher-rate program could offer limited funds but a quick turnaround.
To ensure that you get the best rate, talk to your lender. If you’re eligible, they will help you find these specific potential interest-rate reductions.
What else should you know?
Keep in mind that the best loan programs are developed to do more than cover immediate expenses. Business loans should help your business grow. A lot of small business owners don’t consider debt that way – they try to avoid it – but if you have the right guidance and strategy in place, you can use business loans to your advantage. It helps to talk to your advisors or Pursuit, even if you’re not actively looking for funding now.
It’s also important to beware of upfront fees. While these are not specifically tied to interest rate, they do impact the overall “cost” of the loan. Some loans may be masked with loan interest rates but feature large upfront fees that make the loan appear attractive. Make sure that you’re aware and notified of all potential fees before you sign off on your loan.
Pursuit can help
When you need financing, you’ll want to work with a trusted lender that’s dedicated to your success. That’s Pursuit! We offer more than 15 loan programs, a line of credit, resources, and business advisory services to support businesses across New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington.
We’ve helped thousands of small business owners get the funding and support they need to achieve their goals and dreams, and we can help you, too.
Start your application today and learn more about how we can help you.
