The rate of interest on business loans differs from one lender to another lender. There are a numerous number of internal and external factors that affect Business Loan Interest Rate. Before opting for a business loan to meet your business requirements, a loan borrower must understand both the external and internal factors affecting business interest rate to reduce the overall cost of credit on your business loan. Let’s have a look at some of those factors below:
1) Your credit history
The credit score plays a very important role in determining the eligibility of a borrower before sanctioning a loan to them. The lender expects a good credit score from the borrower, usually a credit score of above 700 or above to get the best deal on a business loan. Alternatively, if you have a poor credit score, your lender might not approve your loan application and if it approves despite having a bad credit score, in that case, you will be required to pay a higher rate of interest on your business loan.
2) Your length of time in business
The age of your business also matters when it comes to determining business loan interest rates. If your business has a proven record and it is running since a longer duration, then it is easier for you to get a conventional bank loan and if you are a startup or have less than three years of business experience, then it might prevent you from obtaining a bank loan easily. Conventional loans with lower interest rates typically require three years of proven history in your business.
3) Type of Business
The business loan interest rate also depends upon what type of business you are running. As lenders determine the credit risk based on the type of business while processing a business loan. If you are involved in some riskier business, then your lender might charge a higher interest rate on business loans to cover the business risk.
4) Business Plan
A lender may even ask you your future business growth plans before providing some financial assistance to you. If you are not confident regarding the future growth of your business, then a lender will provide you with finance at a higher rate of interest. On the other hand, if you present a healthy and feasible business plan before a lender at the time of applying for a business loan would help you fetch a lower rate of interest.
Before sanctioning a business loan to you, your lender will also check your monthly revenue and compare it with the amount that you plan to borrow in order to calculate the interest they will charge on the loan. They might charge you a higher rate of interest in the case when you are new to the business and your revenue is not very impressive.
The borrower needs to pledge some collateral or security against a loan sanction. The banks are willing to take a financial risk against the security and offer a bigger amount of loan in that case. The borrowers can keep anything as collateral or security with the lender such as home equity, real estate, equipment, personal house, or other financial policies etc.