5 Factors that Affect Business Loan Rates

factors that affect business loan rates

Cash is king when it comes to running a small business. Without it, you cannot get your company off the ground, or keep it moving forward years down the road. Simply put, you need cash to pay for things like employee salaries, inventory, expansion opportunities, rent, technology, insurance, and legal fees. If you do not have a good cash buffer to cover your company’s operational costs, you might look to secure a small business loan.

This is the most popular business funding option among business owners in the United States. When looking at your loan options, you are undoubtedly looking for the best rate. Many lenders advertise their ranges of interest rates online, but your rate might be different, perhaps even higher, once you are approved. This Balboa Capital blog article covers five factors that affect business loan rates. It is a must-read if you want to learn more about loan interest rates, and what influences them.

1. National interest rates.

When national interest rates rise, lenders charge more for small business loans. National interest rates, which are set by the Federal Reserve, typically increase when the economy is doing well. Higher interest rates help manage inflation, but they also make it more expensive to borrow.

However, rising interest rates can actually be a good thing. A robust economy and rising small business confidence can result in more consumer and business-to-business spending. That means more sales opportunities for you.

2. The national economy.

As mentioned above, the U.S. economy influences business loan interest rates. During times of strong economic growth, new businesses are started, existing businesses are expanded, and capital equipment investing increases. These factors create a greater demand for business loans and business credit, and this demand is accompanied by higher interest rates.

When the economy is doing poorly, interest rates tend to be lower. The goal of lower rates is to entice business owners to apply for loans so they can invest in their companies, and stimulate growth in the economy.

3. Your personal credit profile.

Many business owners are not aware that their personal credit profiles can be the deciding factor when trying to obtain a loan. A good personal credit profile makes it easier to get approved, and it opens the door to lower interest rates and more repayment term options.

There are several things you can do to improve your personal credit score, and they do not take much time or effort. Make your payments on time, keep your credit utilization relatively low, and do not overextend yourself by opening too many accounts.

4. Your time in business.

Startups and businesses that are under two years old are seen as risky to lenders because they often lack capital, collateral or business credit. There is no question that lenders want to lend money to startups and younger businesses, but they need assurance that they will get their money back.

That is why lenders have approval requirements. Younger businesses that are able to get approved for a loan will most likely have higher interest rates than their more established counterparts do.

5. Your company’s financials.

Make sure you always monitor the financial health of your small business. This will help you identify potential problems in your financial statements so you can maintain a positive cash flow.

In addition, when the time comes to apply for business funding, your company’s good financial standing can help you get a lower interest rate. An attractive balance sheet, cash flow statement, and profit and loss statement are what lenders want to see in a borrower.

The information in this blog post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, investing or accounting advice. You should consult with your accountant, lawyer or tax advisor before making any business decisions or moving forward with business funding.