No matter if you’ve been in business for years or are getting ready to launch a startup company, funding is a must in order for your business to grow and reach its potential. While you may know about the various types of business funding options that are available, did you know that there are all sorts of factors that impact business loan rates? No matter if you’ve owned an accounting firm for 10 years or are looking to start a brand new digital marketing agency, these factors impact all business owners.
Keep reading to learn about the top six factors that play a role in the interest rate that a lender offers you.
1. Business Type
Simply put, some businesses are seen as riskier than others. Your industry or niche may be high risk to a lender which in turn will drive up your interest rate. For lenders, a higher interest rate means that some of the risk is reduced. Aside from your industry and niche, applying for a loan for a new business will also impact your interest rate. Established businesses are seen as much less risky.
Most conventional lenders require at least three years of business history. If your company is a new startup, you may want to look into alternative means of cash flow such as a business credit card, crowdfunding, or securing capital through an online lender.
2. Credit Standing
Both your credit score and credit history are huge factors when it comes to business lending. Not only does your credit standing impact your ability to get approved for a loan, it also impacts your interest rate. To get a low interest rate, you’ll need a good credit score and a solid credit history. This means low outstanding debt, never making a late payment, and having plenty of credit history.
Without a good credit standing, you’ll find that it’s hard to qualify for a loan through a traditional lender. If you do get approved, count on having a high interest rate. To improve your chances of getting approved with an agreeable interest rate, take time to work on both your personal and business credit. You’ll be surprised what can happen in a few months!
3. Your Business Plan
Starting a business without a solid business plan is dangerous. Not having a business plan will also impact your ability to get approved for loans as well as loan rates. Before applying for any type of business financing, it’s important to have a comprehensive business plan. This shows the lender that you’re serious about your company and have a plan for future growth.
When creating a business plan be sure to include:
- An executive summary
- Information about the management team
- Marketing research
- Current income and projections
- Marketing plan
With a detailed business plan, a lender will have a holistic understanding of your company.
4. Cash Flow Stability
Lenders set interest rates based on the risk that you will default on the loan. To show a lender that you have the income to pay for ongoing business expenses plus the new loan payment, you’ll need to be able to show cash flow stability. Your monthly business income should be stable with moderate growth. Slumps in cash flow can be problematic.
Of course, if your company is seasonal you can’t expect to have year-round cash flow. In this instance, write an explanation to the lender as to why your company only produces income six months out of the year. From there you’ll want to show that you not only have enough supplemental income to pay for expenses during the remaining six months, but also that you have enough left over to pay loan payments.
5. Available Collateral
Collateral acts as a lender’s protection in the event that you default on the loan. Collateral can be business equipment, real estate, or inventory that backs the loan. If you are unable to make payments, the lender can seize these assets and sell them to recoup their loss. For most lenders, the more collateral you can put against the loan, the less risk. This in turn means a lowered interest rate.
Startups and small companies often lack the needed collateral. In this instance, it may be best to seek alternative funding options.
6. Economic Climate
While there are some factors you can control, there are other factors that impact your loan interest rate that are out of your hands. Credit availability and interest-rate fluctuations are part of the loan process. There are times when the economic climate is more ideal for business growth than others. If you happen to hop in at a less than ideal time, find a proactive lender that will work with you to get your business the cash flow it needs.
Securing a business loan is no easy feat. Understanding what impacts your interest rate and loan terms makes the process a little less confusing. If you’re planning to apply for a business loan in the future, keep these factors in mind to prepare as much as possible. Have you ever applied for a business loan before? What steps would you take to expedite the process in the future? Leave us a comment in the section below.