If you are searching for a business loan to expand or start a company, you might be speculating on the average interest rate. Well, the average interest rate on a business loan can range anywhere from 2% or 3% to upwards of 100%. With countless types of business loans offered to the borrowers, the appropriate answer is not wholly clear. What is the real interest rate risk for companies?
Understanding your credit situation and the type of loan you require comes in handy in giving you a clear indication of the kind of interest rate to expect. You’ll find various kinds of lenders, such as small community banks, large national banks, online banks, credit unions or even microlenders when looking out for a business loan.
What’s more, you may find different interest rates depending on the type of loan you opt for. The secured loans, for example, incorporates a low interest rate since the lender have collateral to rely on should you default. Merely put, the fact that the offered interest rates are broads means it’s hard to determine whether the given interest rate is competitive. Therefore, you need to evaluate a couple of loan options to find the best deal.
Factors Affecting the Interest Rate
Remember that business loans are meant for businesses and not individuals. So, the lender will assess the company’s credit and finances. Below are the factors that impact a business loan:
Type of Business
Since businesses are different from one another, some are riskier than others. In this case, most lenders will consider this when setting the interest rate.
Type of Financing
Different loans include different interest rates. For instance, a long-term instalment loan will come with a low rate than a business credit card.
When applying for a loan, you will have to provide your company’s financial statements, such as the cash flow statement, income statement and balance sheet. Having a solid financial position helps you get a low interest rate.
Time in Business
Your chosen lender may assess the time your business has been in the industry. Some lenders will not offer loans to new companies, while others may charge high rates to these businesses.
Market Interest Rates
Lenders often base their interest rates on what other lenders on the market are offering. As interests rise or fall in the market, you should expect the same to happen on your loan’s interest.
How to Boost Your Chances of Receiving a Low Business Loan Rate
Although it’s not easy to control all factors that determine your interest rate, there are several tips you can consider to lower your credit risk to potential lenders. They include:
- Improve your business and personal credit
- Consider including a collateral
- Look out for other fees
- Avoid the high-interest loan options
An Overview of Interest Rate Risk
In general, interest rate risk is the potential for investment losses resulting from a change in interest rates. For example, a rise in interest rates will lead to a decline in income investment. When it comes to the interest rate risk, a decrease in interest leads to a low financial income, while a rise in the interests results in a high debt servicing cost.
As an investor in the financial market, a change in an interest’s rate risk will automatically reduce the investment’s value. Think of the bond market, for instance. Remember that a bond is a typical fixed-income investment where its yields and prices move in opposite directions. A change in interest’s rate risk causes the bond price to change as well.
The Final Take
In conclusion, the average interest rate on a business loan fluctuates based on the type of loan you pick as well as the type of lender you borrow from. Nonetheless, the given interest rate may end up above or below the average amount, depending on your business performance and creditworthiness.
Thus, it would be wise to assess your lender’s interest rates and other fees to be well-accustomed to the entire credit cost. In addition, look out for opportunities to boost your credit to pose less risk to prospective lenders.