When looking for a loan for your small business, there are many important factors to consider. These factors include details such as the duration, quantity, and repayment terms, which help you decide whether the small business loan you are applying for will satisfy your business needs. But there is one factor that decides if the loan you apply for will actually help you accomplish your business goals or prove to be a thorn in your side. This refers to the loan rate here.
The loan rate is the percentage of interest imposed as a fee on borrowing the loan. Even though there are hundreds of lenders and dozens of types of loans in the market today, you can never be too careful when looking over the loan rate since it decides how much the loan will cost you throughout the duration of its life.
That is why it is essential to gather as much information regarding business loan rates as possible, so that you may know when, where and how to apply for a loan that will give you a reasonable loan rate that will not hamper your profitability in the long run and allow you to pay the loan off in time.
Lenders and Loan Rates
Loan rates are a great way to help you decide how to choose a small business loan. Banks and SBA loan offer lower loan rates in the range of 2-6% but they have stricter qualification requirements for businesses and take longer to finance your business. Alternative lenders charge higher loan rates ranging from 10% to as high as 30%, but they accept those businesses that have been rejected for conventional loans as well as SBA loan, not to mention, they provide a quick inflow of cash as well.
However, it is prudent to look for small business loans whether conventional or alternative through online lending platforms such as Orumfy, which help ease the loan process and ensure transparency and authenticity between the lender and borrower.
Factors That Decide Business Loan Rates
Let us take a deeper look at the five major factors that decide business loan rates for small business loans.
- Monetary Policy: Monetary policy refers to the money supply and money demand within a country. Governments use this policy to control inflation and liquidity within the country, so to increase liquidity in the money market; they would increase the money supply. When that happens, the business loan rates would reduce since loans would become cheaper due to the greater volume of currency circulating in the economy. The monetary policy is revised at regular intervals and is set by the Federal Open Market Committee (FOMC) in coalition with the Federal Reserve. Thus, the best time to apply for a business loan is when the monetary policy is loosening.
- Inflation Rate: Inflation is the increase in prices of products and services, which is due to the diminished value of the currency. This reduces the purchasing power of the currency and thus leads to higher prices. Inflation occurs when either the demand for the goods or services rapidly increases or the supply of wealth rapidly decreases in an economy. In times like these, it is inadvisable to apply for a small business loan since the interest rates would be much higher than average.
- Supply and Demand of Credit: The demand for business loans is known as credit demand. When the demand is high for credit then the interest rate is high as well since there are more businesses asking for loans and so they need to pay a higher price for the service. Consequently, when the supply of credit is high then the interest rate is low. The best time, therefore, to apply for loans is when the supply is greater than the demand for
- Turnover of Business: Turnover refers to the revenue of the business, which determines the business’s ability to pay off loans. The higher the turnover, the greater will be the ability of the business to negotiate for a lower interest rate since the lender would be confident in the business’s ability to repay.
- Credit Score: Lenders use credit scores as a criterion to assess the likelihood of the borrower paying them back. A credit score is a three-digit number, and it shows lenders or assures them about how likely you are to repay a debt with a delay or on time. The numbers could range from 300 -850 and the determinant factor is how often you make payments on time as well as how many accounts you have in good standing. If you apply for too many loans, it damages your credit score since every lender does a hard credit pull which leads to a reduction in the credit score every time.
These factors decide how much loan rate you might have to pay if you apply for a small business loan. Thus, it is essential to apply for a loan at the right time and with the right lender.