Anytime you borrow money to finance business operations, the lenders will expect you to pay back the principal amount together with interest that is determined when you are borrowing. While average rates for various types of business loans may vary, the expected range is between 2% and 7%.
What factors affect the interest rate on a business loan?
Understanding how best to qualify for business loans and interest applicable puts you in a better position to make informed borrowing decisions. Here are some of the factors that determine how much interest you will be charged by lenders of business loans.
1. The lender
Business loans that are obtained from banks offer the lowest rates of interest. However, expect the qualification criteria to be tougher than for other loan types that are often highly priced. In most instances, bank-issued business loans are charged an interest rate of around 9 percent. However, some online lenders may charge several times the interest rate that you would be charged by a bank.
2. The type of loan
There are many types of small business advances that are on offer, and each of them is priced differently. Small business loans are charged an interest rate that ranges from 5% to 8%.
3. Your financial situation
There are various things that are person-specific that lenders will be looking at before they decide how much they will lend you. Your credit score is one of these considerations. If they are of the opinion that your risk profile is way outside the green, then you will be charged a higher interest rate than someone who has a perfect credit score.
4. The collateral that you offer
Collateral loans that are secured with assets are often cheaper than those loans that are not secured at all. In case you don’t repay your loans, the lender will seize the assets that you gave out as collateral. This is one of the reasons why the lenders believe that they will not be carrying a lot of risk by lending to you.
5. Other considerations
The condition of the market, the sum that has been borrowed, and the repayment period determine the cost of the finance that you are applying for.
Fixed and variable interest rates
At the time of borrowing, it’s imperative to understand if the interest rate that you are being charged is variable or fixed. Remember that with a fixed interest rate, the rate will remain the same every month until you complete paying your loan. However, this is not the case with variable interest loans because the rate changes with the passage of time. With this kind of loan, it’s a little hard to budget how much you will be paying because the amount payable varies.
Initially, a business loan that carries a variable rate may have a lower interest rate. However, this rate may go up and down depending on the underlying index. It’s important to know if you will be on a fixed rate of interest or a variable rate at the earliest instance, since this will help you decide properly.