When you are first starting your business, you want to grow your business, or you need to expand or buy new equipment, sometimes the best option is to take out a business loan. There are all kinds of business loans, from those offered by the small business administration (SBA) to those offered by private lenders, banks and credit unions.
As wide as the type of loans vary, so do the terms and business loan interest rates. The interest rates will be one of the most important facts about a loan, and they can be negotiable. You will need to know a few things about the loan itself to get the best rates.
Look at the term of the loan
The interest rate will often be determined in part by the term of the loan. The longer the interest rate, the lower the percentage will be. This does not always mean that these are the best loans though.
Part of what determines this is the fees that go along with the loan. These need to be rolled into the overall cost of the loan, and then you can use a small business loan calculator to look at your actual APR. This will help you when comparing loans to make sure you are comparing like to like.
Look at the loan size
The other factor to consider when trying to get the best interest rate is the loan size. Often, the larger the loan the lower the interest rate will be. Also, if there are fees involved with the loan, they will equal a smaller percentage of the original principle. Still, they should be added to the cost of the loan to determine true APR.
There are also certain business loans that figure interest differently, some using a factor method instead of a standard percentage. These will usually be something like a factor of 1.15. This means that the interest is actually 15%, but instead of paying interest over the term of the loan, you often pay this amount up front.
In this instance, it is especially important to add fees, especially those figured as a percentage, to the overall cost of the loan to find your true APR. That way, the real cost of borrowing the money over the life of the loan can be accurately calculated.
Don’t forget the fees
The fees mentioned above come in a variety of shapes and sizes, and are either added as flat fees or as percentages. Some loans will come with multiple fees, and some will not entail any fees at all.
The key to remember is that just because you see a lower interest rate stated in the terms of the loan, that does not mean you are looking at the true cost of the loan. For instance, if you have a loan that states the interest rate is 8% and another loan has an interest rate of 9.5%, you need to look at the fee schedule to determine if the lower rate is actually a better deal.
So if loan number one has an origination fee, a processing fee, application fee, or any other named fees, you need to add those in to figure out the actual cost of the loan, and the percentage of the loan that actually makes up. If the amount of the loan is €10,000 and the origination fee is €100, the application fee is another €50, and there is a processing fee of another €50, the result is that you need to add 2% to the 8% loan, making it actually 10%.
If the lender is offering the other 9.5% loan with no fees, the 9.5 % loan is actually a better deal over the long term. When looking for the lower interest rate, don’t forget the fees.
How flexible is it?
One of the best ways to save on the amount of interest you pay overall is to make extra payments or pay off the loan ahead of time. However, some lenders are not as flexible in this area as you would think.
For instance, if you go with certain lenders, they will let you make extra payments toward the principle, reducing the amount of the loan cost overall much faster. Some will not though. Some lenders even have what is called a pre-payment penalty. If you pay off their loan early, it will cost you extra money.
Collateral or no collateral
Finally, sometimes you can drastically lower the amount of interest an institution charges on a loan by securing the loan with some kind of collateral, usually your personal property, investment holdings, or other material things of value.
Because the lender has the recourse to take your things if you fail to repay the loan, they will often lower the interest rate and even wave fees. In the business world, this of course comes with risk. You have to be careful not to compromise your cash flow or risk items you need for everyday operations to secure a business loan.
When trying to get the lowest interest rates on a business loan, you will need to keep some key factors in mind, and remember that rates are always negotiable, but they are not always what they seem. Keep these things in mind when trying to get the lowest rates on business loans.