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Cash is king when it comes to running a small business. Without it, you cannot get your business off the ground or keep it moving forward years later. Simply put, you need cash for employee salaries, inventory, expansion opportunities, rent, technology, insurance, and legal fees. If you do not have a good cash buffer to cover your operational costs, you might look to secure a small business loan with a favorable loan rate.
Many lenders advertise their loan 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.
1. National interest rates.
When national interest rates rise, lenders charge more for small business loans. National interest rates, set by the Federal Reserve, typically increase when the economy is doing well. Higher interest rates help manage inflation, making it more expensive to borrow.
However, rising interest rates can be a good thing. A robust economy and increasing 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. New businesses are started during strong economic growth, existing companies are expanded, and capital equipment investing increases. These factors create a greater demand for business loans and credit, and higher interest rates accompany this demand.
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 to invest in their companies and stimulate economic growth.
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 opens the door to lower interest rates and more repayment term options.
You can do several things to improve your credit score, and they do not take much time or effort. For example, make 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 under two years old are seen as risky to lenders because they often lack capital, collateral, or business credit. However, 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. As a result, younger businesses that can get approved for a loan will likely have higher interest rates than their more established counterparts.
5. Your company’s financials.
Make sure you continuously monitor the financial health of your small business. Doing 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.
Balboa Capital, a Division of Ameris Bank, is not affiliated with nor endorses the Federal Reserve. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.