Small Business Loan Rates
Most small businesses rely on loans for extra funding. When they consider getting loans, one thing they look at are the rates and fees. There are varied rates that are applied to the various small business loan options. This article focuses on the types of business loan rates and average loan rates. Check them out.
Types of Business Loan Rates
- Interest Rates
This is the amount you pay on the principal the lender offers to you. This is often quoted in percentages; it is usually a percentage of the amount you borrowed. Lenders charge interest as the profit they earn on interest rates. When the loan is very risky, the interest rate is higher than a less risky loan. Factors that make a loan risky include the credit score of the borrower. Borrowers with good credit scores are able to access low interest loans because lenders consider such borrowers as creditworthy. Another factor that influences credit score is the credit utilization ratio of the borrower. This refers to the ratio of debt in relation to the total credit balance.The interest rate can be calculated as either simple interest rate and compound interest. The simple interest rate is simple as the name suggests. This takes into account the principal, duration of the loan, and the annual interest rate. Compound interest, on the other hand, recalculates the interest based on the monthly payments.
- Annual Percentage Rate (APR)
The APR is a combination of the interest rate and other fees that are charged when you apply for small business loans. The APR makes it easy to compare the loan rates of loan packages. The Truth in Lending Act mandated lenders to make their APRs known to their customers. This was effective in 1968. This means that lenders are supposed to reveal the fees, interest rates, and the APR as well. This will help borrowers to make informed decisions.
- Factor Rate
A factor rate is just like the interest rate. This term is commonly used when you apply for a merchant cash advance and some short-term loans. Factor rate is expressed in decimals and you will see rates such as 1.35 or 1.4. When you use factor rates, it is easier to make calculations. You will only multiply the factor rate by the total amount borrowed. For instance, when the factor rate is 1.4 and you are borrowing $10,000 for one year, the total amount will be $14,000.
Small Business Loan Fees
Apart from factor rates, there are fees that are also attached to loans. Not all fees are charged at the onset. Some lenders do not charge certain fees at all.
- Origination Fee
This fee is also a percentage of the loan amount. This fee is charged at the onset of the process. This fee is used to cover the administrative cost. The lender’s time used for calls, interviews and all others are recovered through the origination fee. This fee differs from lender to another.
- Guarantee Fee
This fee only comes along with SBA loans. The SBA does not lend to small businesses; it only guarantees the loan that is provided by approved lenders. The lender will pay a portion of the guaranteed amount to the government. This amount is passed on to the borrower as the guarantee fee.
- Application Fee
This fee covers the cost of processing your loan application. This includes reviewing your credit score or business property appraisals.
- Late Payment Fee
You do not need to pay this fee if you make payments on time. Most lenders charge this fee to penalize people who do not make payments on time. Keep track of your payment dates so that you do not miss payments. You can also set up an automatic payment process where the loan amount will be taken from your account directly on the due date. All you need to do is to leave enough cash in your account before the due date.
- Check Processing Fees
This fee is charged when a borrower decides to pay the lender through checks. Payment through checks may attract a fee because they take time. Generally, lenders do not like this payment method.
- Prepayment Penalty
When you pay after the due date, you will pay late payment fee. In the same way, paying before time may also attract a prepayment penalty. You should note that not all lenders charge this fee. Some lenders charge this fee in order to claim the profit they will lose on interest payments when you pay early. Some lenders charge a flat fee. Other lenders also make you pay the remaining interest or part of the interest. Since some lenders do not charge prepayment penalties, read the lender’s conditions to check if there are prepayment penalties or not before you sign the loan contract.
- Underwriting Fee
This is similar to the application fee. The lender recovers the time he or she used in the processing of your application through this fee.
Average Loan Rates by Small Business Lenders
This part focuses on the average loan rates charged by lenders based on the category of the lender. Although it is difficult to access loans from large national banks, large banks are known to offer the lowest rates in the market. Most businesses are unsuccessful when they apply to large banks because these banks have high credit score requirement among others. They are also not willing to offer small amounts as a loan. Large banks charge between 2.55% and 5.14% as an interest rate. Their average annual rate charged by this category of a financial institution for SBA loan is 6.24%.
Small and regional banks also charge an average annual interest rate that ranges from 2.48% to 5.40%. The average annual interest rate for this category for SBA loans is 5.96%. Foreign banks charge an average annual interest rate that ranges from 1.45% to 5.66%. Online or alternative lenders also grant loans at an average annual interest rate that ranges from 13% to 71%. The SBA loans they offer also have an annual average interest rate that ranges from 4.39 to 7.01%.
Average Loan Rates by Loan Products
The average interest rate varies by product as well. Some loan products are known to attract a higher interest rate than others. Bank loans are usually difficult to qualify for but they have the lowest interest rate. Bank loans require that you have a good credit score, and you will need to complete lots of documents. You will need to visit the lender’s office to complete the application. The lenders will run credit checks and other necessary checks on you before approving your loan. This can make the approval and funding of your loan run into weeks. Hence, many people consider all these when you consider bank loans. If it will not be convenient for your business to wait for weeks to get funds, you may have the forgo the low rates offered by banks. The average APR they offer ranges from 4% to 13%.
SBA 7(a) loan is also another loan product that attracts low interest rates. This loan option is easy to access because it is guaranteed by Small Business Administration. The average APR offered by lenders who grant the SBA 7(a) ranges from 6.30% to 10.00%. Online term loans attract a wide variety of rates. The rate can be as low as 7% and as high as 99.70%. The rate usually depends on your creditworthiness. They can sometimes charge extremely high since some of these lenders accept bad credit scores. The lower the score, the higher the risk of lending to that borrower, and the higher the interest rate.
Lines of credit is a reliable way that business owners can get fast funds for their businesses. This loan option also depends on the creditworthiness of the business owner. Some lenders consider the credit score of both the business and the business owner. This explains why the range for this loan rate wide. The rate ranges from 8% to 80%. Merchant cash advances are considered the most expensive form of business funding. Their lowest average APR they charge is as high as 20% and they can even charge up to 250%. Invoice factoring is another loan option for business owners. The average APR ranges from 13% to 60%. With invoice factoring, lenders consider the creditworthiness of the customers who owe the invoice and not the business owners.