Cash is king when it comes to running a small business. Without it, you can’t 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 don’t have a good cash buffer to cover your company’s operational costs, you might seek 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 banks and lending companies advertise their ranges of interest rates online, but your rate might be different – perhaps even higher – once you are pre-approved. This Balboa Capital blog article can help you better understand business loan interest rates; it looks at five factors that determine them.

1. National interest rates.

When national interest rates rise, banks and lending companies charge more for small business loans and business lines of credit. 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 impacts 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 or lines of credit 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 or line of credit. 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 don’t take much time or effort. Make your payments on time, keep your credit utilization relatively low, and don’t 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 by banks and other lenders because they often lack capital, collateral, and business credit. There is no question that banks want to lend money to startups and younger businesses, but they need assurance that they will get their money back. That’s why they have stringent approval requirements. Younger businesses that are able to get approved for a loan or credit line will most likely have higher interest rates than their more established counterparts.

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. And 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.