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Interest Rates are Rising Fast, Learn How You Can You Lock Your Interest Rate Today

By April 14, 2023October 3rd, 2023Funding

Right now, Federal Reserve data suggests that banks provide business loans at interest rates ranging from 2.54% to 7.02%. This variation of interest rate percentages is due to several factors, which we’ll take you through as you read on.

If you’re a small business owner, you should spare some time to learn and understand loan costs for small businesses. Doing so will allow you to pick the loan options that are best suited for your business, which can provide not just much-needed financing, but also help you save money.

Factors that affect business loan interest rates

The interest rate you pay on a business loan refers to the money charged by a lender. For a money lender, financing is a service. So you can think of the interest rate as the service fee you have to shell out to avail of the service. Typically, business loan interest rates are affected by the following factors:

  • The type of lender: For small business loans, you can approach not only banks but various online lenders as well. If you don’t want to pay a lot of money as interest, it’s best to consider the small business loans offered by the banks. However, while banks offer loans at low-interest rates, qualifying for their loans can be a challenge. On the other hand, it’s easy to qualify for loans offered by online lenders, but the interest rates are significantly higher compared to those charged by banks. Interest rates for online business loans typically start from 7% and can go up to a whopping 99%.
  • The business owner’s financial situation and credit history: The interest rate you are charged by a bank or an online lender will also depend on your current financial situation and your credit history. If the lender comes to the conclusion that you are a risky borrower, expect to be charged a higher interest rate.
  • The type of loan: Interest rates also differ from one type of loan product to another. Loan products specifically designed for small businesses include Small Business Administration (SBA) loans, business line of credit, business term loans, short term loans, accounts receivable financing, merchant cash advance, and more. If low-interest rates are your priority, you should consider SBA loans, which charge 5.50% – 8% interest. You can pick from three types of SBA loans – 7(a) loans, 504 loans, and Express loans. 7(a) loans are the most popular, while 504 loans are typically used by businesses to fund projects. Express loans involve fast application reviewing and rapid financing, which is ideal for the times when you need a quick injection of funds into your business.
  • Business collateral: Securing loans with collateral typically results in better interest rates as it is effective risk mitigation for the lender. If you fail to repay the lender, it can seize your assets.

While these are the most important factors that affect business loan interest rates, other factors might come into play as well, such as:

  • The total sum of money you borrow from a lender
  • The conditions of the market
  • The repayment period length

Do small business loans have fixed or variable interest rates?

Some small business loans have fixed interest rates, while others’ interest rates are variable. In terms of ease of repayment budgeting, it’s better to opt for a loan with a fixed rate, as the monthly payments and interest rates are not subject to change. For instance, lump-sum term loans, which are ideal for long-term financing requirements and one-time purchases, have fixed rates.

Loans with variable interest rates typically have low rates of interest initially compared to loans with fixed rates. This can make such loans appealing. However, the catch is that the interest rates tend to go up with time. Of course, that might not be the case and the interest rate may go down as well. All in all, these loans are unpredictable as their interest rates are tied to a fluctuating underlying index, which makes for tougher budgeting.

An example of a small business loan that has a variable interest rate is a business line of credit, which involves borrowing money and repaying it continuously, similar to a credit card. If your business doesn’t require a fixed amount of money, this type of loan can be quite effective for boosting short-term working capital or securing funds during an emergency.

Types of loan fees

Borrowing is made more expensive due to loan fees, which are upfront fees charged by lenders. The amount you have to shell out to pay them depends on several factors such as loan size and loan type. credit score, and repayment term length. It’s the responsibility of the lender to maintain transparency regarding the loan fees and what they cover.

The following loan fees may be charged by lenders when providing small business loans:

  • Origination fees, which refer to the upfront fees that lenders charge to process new loans
  • Closing fees, which are associated with loan servicing, such as a business valuation
  • Underwriting fees, which are charged by underwriters who are responsible for verifying and reviewing documents such as tax returns, personal bank statements, and other financial statements
  • SBA loan guarantee fees, which range from 0% – 3.75% on the basis of loan size

Comparing business loan rates: The best way

Comparing the annual percentage rate is the best method to come to a conclusion as to the loan that’s best for your business based on its requirements. The annual percentage rate is inclusive of the interest rate and additional loan fees.

At Corporate Capital Direct, we understand that the variety of loan products in the market can make it confusing for small business owners. This understanding has led us to provide financing solutions to small businesses that need them most. Simply apply for financing without upfront fees and minimal paperwork, tell us your story, and we’ll evaluate your situation and get you funded within 24 hours – it’s that simple.

So, if you want your business to be matched with the best business lenders suited to fulfilling your requirements, get in touch with us, and get financed.