Business Loan Rates
Businesses need funding irrespective of the size of the business. If you want to expand your business, you may need funds to hire employees, advertise your business, expand your workspace, invest in more furniture, and many other things. It is true that not all businesses need these kinds of things but no matter the kind of business you have, you will still need funds to grow your business.
Even established businesses need money to maintain the business. Many businesses rely on loans to grow their business and due to the increased demands for business loans, banks have designed loans to suit business types. Small business loans are such loans offered to small businesses only.
One of the most important things many people ask about when they want to apply for business loans is the rates. There are three main types of rates for business loans.
- Interest Rate
This is the most common rates that are applied to loans in general. Lenders make profits through the interest rates they charge on the loan. This is the amount that a lender charges on the principal amount. This rate is expressed as a percentage of the principal. there are two main types of interest rates charged on loans. The simple interest rate only considers the principal amount, the loan term, and the annual interest rate on the loan.The compound, on the other hand, is complex and it involves more than the interest rate. With this, the calculation is done based on the interest and principal compounded in the previous pay period. In other words, your first payment will include only the principal and the interest rate. The next payment will include the interest accumulated on the first payment, the principal, and the interest rate. The next payment will also the interest accumulated on the previous payment. This is how it will be calculated until you finish paying the loan. At the end of the day, you will pay more as interest rate if the compound interest rate is used instead of the simple interest rate.
- Annual Percentage Rate
This rate type is commonly abbreviated as APR. The APR includes all the payments you will make for a loan. It includes the annual interest rate and the fees. Every fee you will pay such as origination fee and the closing fee will be captured in the APR. APRs help in comparing several loans. However, there is a limitation and this limitation sometimes misleads people. Sometimes, APRs on short-term loans can be higher than those on long term loans. that does not mean that you will more as the interest rate on the short term loan than the long term long. The short-term loan APR is higher because the lender is charging interest over a short period of time.
- Factor Rate
The factor rate is one of the rates that is associated with business loans. This rate usually comes into play when you are looking into merchant cash advances or short-term loans. With factor rates, your loan remains the same even if you pay early or pay more than the minimum loan payment. The factor rate is represented by a decimal figure and not a percentage. The rate ranges from 1.1 to 1.5. to get the total loan cost, you will multiply the loan amount by the factor rate. Factor rates are more expensive than other types of rates.
Types of Business Loans and Loan Rates
- Traditional Bank Loans
These loans can be accessed at the traditional banks and they have low interest rates. You can be granted a loan with an interest rate as low as 4%. The problem with accessing this loan is that it is difficult to meet the requirements for the loan. APRs for this loan ranges between 4% to 13%.
- SBA Loans
This loan is the popular loan option for business loans. Their interest rates are a bit higher than that of the traditional banks, however, it is easy to qualify for this loan. The APR ranges from 7.5% to 10%. What makes this loan easily accessible is the fact that the government guarantees a part of the loan. This makes the loan less risky. The SBA loan is offered by a government organization called the SBA. There are three types of SBA loans namely, 7(a) loan, CDC/504 loan, and microloan. The 7(a) loan is the most common of the three loan. the maximum you can access under this program is $5 million. You should note that you will pay guarantor fees when you take this loan. the APR for this loan ranges between 6.30% to 10%.
The CDC/504 loan is for specific purposes although it is also an SBA loan type. You can only consider this loan option if you want a loan to purchase major assets. Assets such as pieces of land, buildings, and big equipment can be with this loan. this loan bears the name CDC because it is partly funded by the Certified Development Companies (CDC). The microloan program, on the other hand, is a program that is designed to help the start and growth of small businesses. This loan is funded by the SBA but not directly. They offer the funds to intermediary lenders who take charge of the lending process.
- Merchant Cash Advances
With this option, the cash provider will give you the funds as a cash advance and you are expected to pay back daily with a percentage of your credit card sales. It is easy to qualify for this loan, however, you need to keep proper accounts of your daily sales. You will also need to manage your accounts well. This is because the daily payments can disrupt your cash flow. The range for the varies, however, you can pay between 20% to 250% as APR.
- Short-term Loans
Most of the lenders who offer these short-term loans are online lenders. The loan term ranges from 3 months to 18 months. The APR depends on the lender, however, businesses with good credit scores get lower rates. It is easy to qualify for this loan and the loan process is fast. The APR for this loan option ranges from 7% to 99.7%.
Fees That Affects Small Business Loan Rates
- Application Fees
Some lenders charge application fees for processing your loan. If the lender will conduct a credit check before approving your loan, the application fee will cover those expenses. You should note that application fees are not refundable even if the lender does not approve the loan.
- Processing Fees
The processing fee is meant to compensate the lender for their time and energy spent in reviewing and approving the loan. This fee is sometimes high, you can pay up to 5% for this fee.
- Origination Fees
The origination is also similar to the processing fees. This ranges from 1 to 9%.
- Service Fees
Your relationship with the lender does not end after they approve your loan. You will be repaying the loan to them. They may offer services such as billing and they may charge you periodically for these services.
- Prepayment Fees
Some lenders will also charge you for paying your loan before the due date. They charge because they will not get the full amount they charged as an interest rate. When you pay off your loan early, you will cut out the interest rate payments for the remaining months. The lender will lose out on interest rate due to the early repayment. They will, however, compensate themselves by charging you prepayment fees. This fee ranges from 1% to 9%.
- Late Fees
Lenders do not only penalize you for paying off your loan before the due date. They will also penalize you if you do not pay your loan on time. This fee can be expensive. You should avoid this fee by paying your loans on time. Always know the next payment date before it is due and make sure you pay on that day.
- Check Processing Fees
If you pay your loan via check, the lender will charge you a fee. This fee will cover the cost the lender will incur while cashing out your check.
- Closing Fees
The closing fee includes most of the fees discussed above. Fees charged by the lender while processing your loan will be captured in the closing fees.
Joshua is a financial lawyer who plans on writing a book about his experience on debt collection laws and lending terms and conditions. He is currently one of the senior partners at his law firm but wants to take more time off for his writing.
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