Businesses borrow for several reasons. Whether it’s for grand plans of expansion, the purchase of fixed assets, or the management of day-to-day business operations, a business loan can be a constructive way of infusing funds into a firm. But before you head out to borrow a business loan, it’s important to assess the associated costs, commonly the business loan interest rate.
Knowing the factors that influence the business loan interest rate can help you plan better before applying for a loan. Several factors listed below determine the business loan interest rate.
Any lender will, before anything else, look at your credit score to assess suitability for a business loan. Not only that, the higher your credit score, the better your chances are for a faster loan approval & for getting a reasonable business loan interest rate. A credit score upwards of 600 will work in your favor.
Your credit history directly impacts your credit score. Therefore, before making a loan application, ensure that the business makes timely repayments on existing debt. Remember your credit score is a crucial component of your financial identity; keep it as robust as possible at all times.
Type & Age of Business
What kind of business are you running? The magnitude of risk involved in running a business also determines the business loan interest rate. So if you’re borrowing for an innovative startup, chances are the business loan interest rate would be higher. Similarly, if the business is well-established for a long time, the rates offered to you would be much lower than those offered to a newbie.
If you can show experience in the field and business acumen, loan terms might be easier. For example, if you apply for a business loan at Finserv MARKETS, more business experience can fetch you a loan at a lower interest rate.
A concise and robust business plan that presents a) all financial information transparently and b) growth projection estimates can also help convince the lender that the business will be successful. This can, in turn, translate into lower interest rates.
The Financial Health of the Business
What your credit score tells through one number, your business books tell through detailed records. A lender will examine your cash flows, balance sheet, P&L account to assess the financial soundness and profitability of the business. A profitable business is likely to attract a lower business loan interest rate.
A part of your financial health also comprises the assets available as collateral. If you go for secured loans, collateral can help you fetch a lower interest rate. Business loans at Finserv MARKETS are unsecured, so you need not worry about the collateral here.
All the factors listed above, collectively, determine the business loan interest rate that a lender will offer you. It is also recommended that you do your research before deciding on a loan: evaluate the options available, check if the lender is offering fixed rate or diminishing balance rate of interest like Finserv MARKETS does, and assess which option aligns best with your business risks and needs.