How Should You Compare The Interest Rate Of Small Business Loans?
Small business loans refer to the cash that business owners borrow from a bank, a credit union, or a lender. The borrower can use the money for working capital, real estate, inventory, renovations, asset acquisition, and business acquisition. Running a business can be stressful and lead you to borrow from various finance solutions. To ensure the well-being of the finance of your business, comparing loans is essential to get the best deal. There are many lenders in the market, and one of the deciding factor is the rate of interest they offer.
Points to consider while comparing business loan interest rates:
While repaying, borrowers pay some money added to the principal amount to the business lenders. This extra money is the percentage of the principal amount loaned and is known as interest. The calculation of interest rates depends on the risk factor borne by the lender. The interest rate increases as the risk rises. In Australia, the interest rate generally ranges from 10% to 25% per annum for non-bank financial lenders. The various business interest rate options offered are as follows.
1. Fixed-rate of interest
The borrower has to pay the interest rate each month as fixed. You must pay the exact monthly payments during the entire loan life. Any fluctuation in the cash flow is independent of the number of repayments. Since you know how much to repay each month, you can create a business budget. You also know the overall loan repayment amount.
If, however, the market changes and business lenders offer a lower interest rate, there will be no changes in the fixed-rate mortgage. Also, if the market rates go up, you will still be paying the lower rate fixed earlier. Borrowers get protected against market swings.
2. Variable-rate of interest
The interest rate is variable, and the amount for repayment moves up and down. If the rate falls, repayments will get reduced. If it rises, the repayment amount will also increase. Borrowers will be paying a different payment each month. The monthly payments do not differ widely from one another in a stable economy.
One of the downsides of this interest rate is that payments will increase as the rates go up. Budgeting your business is difficult because you do not know the exact repayment amount until you have repaid everything.
3. Combination rate of interest
Another type of interest rate for private business loans is the combination rate. Here, lenders offer a fixed rate for the first year (or first two years) of repayment tenure. Thus, the rate reverts to the standard rate of interest as applicable. This period is known as the honeymoon loan period.
To select one of the three interest rates, choose the one that will suit your business profile, loan budget, and goals. Those who want to repay the small business loans early should borrow from lenders who will not levy early repayment fees. Sometimes, the lender charges a one-time or a monthly fee for providing the loan. Keep all these factors in your mind while searching for the best deal in the market.
Be prepared with a loan amount and term in your mind while considering a business loan. These factors will help in calculating the interest rates. Borrowers have to pay Equated Monthly Installments or EMIs to the lender. Each EMI contains two parts: the principal borrowed and the accrued interest.
How to decide upon a rate of interest?
The type of interest rate that you can select is dependent upon the needs and the cash flow of your business. When choosing between these private business loans types, you have to decide how much risk you can take. If you want to be predictable about your business expenses monthly and do not want to be vulnerable to market fluctuations, a fixed interest rate is the best way to go. If your business has some breathing room in the monthly expenses, choose a loan with a variable rate. Although it involves a bit of risk, you may get low rates and end up saving money. Choose a variable rate only if your business can tolerate some fluctuations in the monthly budget.
It is a good idea to study the interest rates of various loans to know what you are getting into. Interest rates offered to different businesses vary because business lenders use a variety of factors to calculate them. Some factors include the loan amount, purpose of the loan, tax returns, financial statements, and information about debts and assets. Credit history for business and personal loans, number of loans you applied for before, joint mortgage applications, repayment history of previous loans, and loan terms are some other factors the lenders consider commonly.
The payable interest rate also depends on the way of calculation. Some of the ways are:
Annualized Percentage Rate (APR) :
The calculation includes the lender interest rate and small business loan providing fees. It is the best parameter to get a real-time view of the actual loan cost.
Invoice factoring companies charge a discount rate and the percentage of the invoice amount getting mortgaged.
The factor rate is a multiplier applied on unsecured fixed-term loans.
Early Repayment Fees
Some lenders charge early repayment fees to compensate for the loss of interest.
We hope that this article will help you compare the interest rates of private business loans and find the best deal. Remember that the ideal deal will be different for all businesses.