There are multiple reasons why you need a business loan. For starters, you can use one to start a business, increase your working capital, purchase equipment or inventory, hire more people, or expand your services or product offerings. However, regardless of how you’ll use a business loan, you must get a good interest rate.
A business loan’s interest rate is the amount of money that’s added to the money you need to pay back to the lender. You can consider it a fee you’ll give the lender for the loan, and it’s the main way lenders profit.
The interest rate of your loan is often calculated as a percentage of the amount you’ll owe. For example, you loaned AUD$1,000. If the loan has a 2% interest rate, you need to pay AUD$2 on top of the AUD$1,000 you borrowed.
Basic math dictates the lower the percentage or interest rate, the better, as you need to pay less. Now, the question is what’s a good interest rate for a business loan? For you to know and find out, continue reading this article.
Average Business Loan Interest
Thankfully, most lenders and banks only demand or offer lower interest rates for their business loans. Often, they’ll be in single digits.
Interest rates can vary depending on the institution you’ll get your business loan. For example, if you get your business from online financers, you can expect that the interest rates you’ll encounter will range from a hefty 7% up to a terrifying 100%.
Meanwhile, you can expect lower interest rates from 2% to 13% if you get them from banks, credit unions, and traditional lenders. You should consider them as your first option.
Note that there are two common interest types: fixed and variable. So, what’s the difference between fixed vs variable interest? Fixed interest stays the same throughout the payment term while variable changes depending on market fluctuations.
Variable interest rates can go lower than the average or higher. It poses a few risks and concerns for both the borrower and the lender. And before you accept a loan with this type of interest rate, you must perform diligent research first.
Interest Rates Can Change Depending on Your Payment Option
Most banks and lenders will adjust your loan’s interest rate depending on the payment option or term that you choose. By default, the faster you can pay your loan, the lower the interest will be. And the longer you can pay, the higher your interest rate can be. However, not all lenders can be flexible regarding payment terms.
Aside from that, if you go for a secured loan, you can further reduce the high interest rate you may get. Offering collateral or asset for your loan ensures lenders that they can get their money back even if you can’t pay back on time or pay at all — effectively reducing their risk.
Your Credit Rating Can Affect Your Business Loan’s Interest Rate
If you already have an established business, you may still need to get loans to resolve concerns or expand it. However, remember that your business’s financial performance or credit rating can greatly affect the types of loans and interest rates you can acquire.
A better credit rating can net you lower interest rates as it can guarantee lenders that you can pay on time. Unfortunately, according to a small business lender, nine out of ten small businesses in Australia need to be made aware of their current credit rating. Thankfully, you can easily find your company’s credit score on the web and through the help of third-party companies.
Your Business Track Record Can Affect Your Business Loan’s Interest Rate
Aside from a good credit rating, a good business track record can help you get a good interest rate on your business loan. A good track record means your business is experiencing steady growth and cash flow. And, of course, having that kind of record will give lenders an easier time lowering your interest rate compared to what they give to startups.
Conclusion
It’s ideal to acquire a loan with low interest rates. However, it’s not as simple as that. You should also consider all the factors that have led to that rate and the fine print that comes with it. Also, research and plan carefully before you even consider getting a business loan. After all, having a business loan you can’t pay on time can only set you up for higher interest rates in the future. Consider the ideas mentioned here as you plan and prepare.
