If you are reading this page is because you are looking for the secret to find the best interest rates for a small business loan.
We want to be honest with you since the beginning: no website can give the magic number you are looking for. But the good news is that we can help you to ask the right questions when you talk with a financial institution or an alternative lender. Or if you want to save time on shopping around, speak to a finance broker (why a finance broker?) but make sure to ask the right questions!
The interest rates for a small business loan depends on different factors.
If you become familiar with them, you can address specific questions that make understand the lender or the finance broker that you are a proficient borrower.
- Type of small business loan: the list here could be very long, but we limit it to the most popular finance products such a secured business loan, unsecured business loan, equipment finance, merchant cash advance, business line of credit and invoice factoring. For example, secured business loans usually apply much lower interest rates compared to unsecured business loans.
- A business loan with or without collateral: securing a loan against an asset or not make a massive difference in terms of the interest rate. Why is that? Well, the risk that the lender is taking to give you funds is higher when there is no collateral, but at the same time, it is easier to be approved, and most importantly the business is not liable in case of default.
- Extra fees and penalties may apply when a lender approves a loan:
- Application fees: it can be a dollar figure or a percentage of the loan amount. It is usually paid at the beginning of the small business loan.
- Service fee: they are ongoing fees charged weekly, monthly or annually.
- Fees for early repayment: the flexibility to pay off the loan faster and earlier comes with a cost.
- Dishonour fees: it is a fee charged, for example, for late payment due to lack of funds or any other reason.
- Length of the loan: the longer the loan, the lower could be the interest rate, but the higher could be the total cost of the small business loan.
- Ability to make additional or lump sum repayments to pay off the loan faster.
- Loan portability.
- The loan amount requested.
- Ability to take extra credit with the same or other lenders.
- Documentation needed to get the application approved: depending on the type of small business loan, more or less documentation can be required by the lender including driver’s licence, ABN, bank statements, tax returns, sales and cash flow forecast, business plan and credit score.
No matter the reasons why you are seeking a small business loan (start-up financing, grow your company, renovating your premised, hiring staff, buying an asset) you do not want to cripple your business under the impossibility to make the repayments.
You need to consider the best interest rates, with the right term length and with the flexibility to pay off the business loan faster.
Below a short glossary that may help you better to understand some small business loan terms and conditions:
- Account balance: The amount of money you have in your account.
- Business loan: a loan granted to fund a business and its proceedings.
- Business overdraft: a line of credit that becomes available to a business when it makes a withdrawal for a higher amount than the balance in your business’s debit account.
- Fixed interest rate: a fixed interest rate remains the same for the entire duration of the loan.
- Loan balance: the amount of money left to be repaid on a business loan.
- Loan term: the term of the loan usually refers to the length of time the borrower has to repay the loan. This is different to the loan terms and conditions, which are a full list of the lender’s requirements in agreeing to offer a loan, including the interest rate, fees and charges, and the loan term.
- Risk margin: when setting the interest rates on a business loan, lenders apply a ‘risk margin’ based on how risky it is to lend to the business. Lenders consider factors including how successful the business already, and its prospects for future success such as its location, customer base, ability to service debt, and the reason for borrowing. Learn about business loan risk margins here.
- Secured loan: a loan that is backed by ‘security’ (collateral) such as the property the business owns (commercially secured) or the home the business owner lives in (residentially secured).
- Unsecured loan: a loan obtained without security (collateral).
- Variable interest rate: A variable interest rate fluctuates over time based on the RBA cash rate and the lender’s business decisions.