Business loan interest rates ultimately determine how much you’ll pay over the lifetime of your loan or financing product. Ideally, you want to secure rates as low as possible – since this would mean lower payments and increased savings.
Realistically, the business loan interest rates you receive will depend on a variety of different factors. Most notably – your business’s finances, credit score, history, industry, and more. Here’s how they break down.
Healthy cash flow
Cash flow is a measure of how much money is moving through your business at any given time. Cash flow helps lenders understand your income vs expenses as well as your potential for profitability. Most significantly, cash flow is critical for keeping your business operating on a daily basis.
Businesses that struggle with limited cash flow or frequent disruptions are at greater risk of being unable to manage their expenses – including loan payments. In the worst case, cash flow problems can even result in your business being closed.
Expect lenders to review your bank statements and analyze your business’s cash flow. This is to help them understand whether your business will be able to manage loan payments. Strong, healthy cash flow is a signal that your business is less risky – which will, in turn, help you secure lower interest rates.
Type of business and industry
The type of business you operate and your industry at large can indicate your potential for growth. Lenders prefer to work with businesses in industries that are poised to expand or at least strong enough to generate steady returns. If this sounds like your business, you may be able to use this information to secure lower interest rates.
On the other hand, seasonal businesses, younger companies, or firms in declining sectors may appear riskier to lenders – resulting in higher interest rates.
Your credit score is a starting point for lenders to gauge your riskiness as a borrower. Especially at traditional banks, your credit score may determine whether or not your business financing application will be approved at all.
Even then, if you are approved with less than perfect credit your score will still have a major impact on the interest rates you qualify for.
Strong credit typically results in lower interest rates and more favorable terms that would help you save over the lifetime of your loan. Weaker credit, on the other hand, makes it less likely for you to be able to secure the best rates.
Some businesses will try to hold off on financing until they improve their creditworthiness. This can be a sound strategy for obtaining better interest rates. Unfortunately, it can also take some time – and may not be feasible if you’re in a time crunch.
Some lenders, especially banks, may insist you provide collateral in exchange for financing – otherwise known as secured financing. Collateral is any type of asset you or your business owns that holds value and can underpin the loan. In case you’re unable to make your payments, lenders have the right to seize your collateral in order to recuperate their funds.
Collateral helps your business appear less risky as a borrower while also offering an extra layer of protection for lenders. In other words, collateral can help you secure lower interest rates on financing.
Unfortunately, not every business may have access to assets large enough to qualify as collateral. This is especially true for younger, smaller businesses.
While secured financing can sometimes help you save on interest rates, it’s also associated with a number of risks. Most notably, you risk losing the asset you’ve signed off should you be unable to meet your payments obligations. If you’ve used your personal residence or critical business equipment as collateral, you may find yourself in an extremely precarious situation.
Other existing loans
Lenders tend to be hesitant to work with businesses that have multiple outstanding loans. This creates doubt about cash flow strength and your ability to manage payments on a new loan – which may result in higher interest rates or application denial.
The only exceptions are for debt consolidation or refinancing. Debt consolidation is when a new loan is taken to pay off multiple existing loans, with the aim of making payments more manageable or securing a lower interest rate.
How to Find Favorable Business Loan Interest Rates
The factors outlined above will influence the individualized interest rates your business will qualify for. But market factors will also play a role.
For example, the Federal Reserve has kept interest rates near zero since March 2020. This policy has promoted a competitive lending market and helped many businesses secure affordable financing.
At this time, the Fed is considering tightening monetary policy in an effort to curb growing inflation. The latest reports estimate that the Fed could start raising rates as soon as March 2022. When this happens, businesses across the board should expect financing to get more expensive.
This is why businesses contemplating financing will want to lock in loans now – before interest rate hikes hit the market. Don’t know where to start? It helps to turn to National, the leading online marketplace for business financing.
National allows you to compare individualized financing offers from over 75 different lenders – taking into account your unique business criteria. Choose from business loans, lines of credit, equipment financing, and more. Plus, financing works fast – in as little as 24 hours. Learn more here.