When business owners find themselves in need of extra capital for their business, whether it is for managing unforeseen expenses, meeting short-term obligations or simply for expanding operations, they look for smallbusiness loans. In the United States today, there are over 29 million small businesses and to provide them with the adequate funding, there are thousands of loan lenders. So the opportunity to get a loan for your business is ample, to say the least.
Yet for most, if not all, business owners acquiring a loan is a daunting prospect because of the minute intricacies and complexities that need to be considered to get the right loan. Many would consider loan rates to be the most important of these details to consider before applying for a loan. Not only do they determine how easily you will be able to pay off the loan in the long run but they can also tell you a lot about the type of loan itself.
What is a Loan Rate?
In simple terms, the loan rate is the rate of interest that has to be paid on each payment of the principal amount. Interest is the fee for borrowing money from the lender, whereas the principal amount is the total original amount borrowed altogether.
For instance, if you take out a loan of $50,000 at a loan rate of 6%, then the principal amount will be $50,000 with $3000 as the interest that has to be paid with every repayment.
Usually, you will hear the term Annual Percentage Rate (APR) a lot as well when considering taking out a business loan. This is not to be confused with the loan rate since the APR is always higher than the loan rate itself. Where the loan rate only tells you the fee to be paid for borrowing the funds, the APR includes the year-round expense of the loan including costs such as administrative cost, underwriting fee, loan processing fee and the loan rate itself.
What Loan Rates Tell You About a Loan?
In a nutshell, the loan rate tells you how expensive the loan is going to be. This is an important factor in helping you decide how to choose a small business loan. The point of a loan is to help you out of a tough spot, or kick-start a new phase of your business.
But if the loan rate is too high for your annual revenue stream, it is only going to make things more difficult. After all, cost efficiency is the most basic concept for successfully running a business and if the cost of the loan exceeds its usefulness then it is a bad business decision. Of course, there are many different loan options as well as lenders out there and the best way to know which one suit your business needs is to take a good look at the loan rate.
Usually, financial institutions and government lenders such as banks and the Small Business Administration (SBA) provide loans with a lower loan rate, whereas most alternative lenders charge a much higher interest rate on the loans. This is because where banks have millions of dollars in deposits or are insured by the SBA branch of government to give out loans; alternative lending parties are mostly private and give loans to businesses that have been rejected by banks. This means they pose a higher default risk and so are charged higher interest rates. However, it is always a good idea to apply for business loans through online lending platforms such as Orumfy which make the terms and conditions clear and create ease and transparency in the loan application process.
Of course, different types of loans have different loan rates. Usually, larger short-term loans have the highest loan rates whereas medium to long-term loans has lower interest rates. Large national banks charge 2.55% to 5.14% interest rate on short to medium term loans and the rate is almost identical for local and foreign banks. SBA loans have a slightly higher interest rate of 6.24% as charged by large national banks and 5.96% by local banks as of 2018.
Alternative loans have interest rates as high as 15% to 30% for working capital 13% to 16% for invoice financing. Of course, this higher loan rate is accompanied by quicker financing that takes no more than a few days at the earliest and a few weeks at the latest. The qualification requirements are also more lenient for alternative loans which explain why the loan rates are so high since the businesses that apply for these loans have a higher default risk.
Other factors that determine business loan rates include monetary policy, inflation rate, type of loan, personal credit score and much more. Thus it is essential to gather as much information about the loan rate as possible while applying for a small business loan.