If you are a small business owner, you have probably spent considerable time researching various business loans that can support your growth efforts. These loans, specific for small businesses, are made possible through the U.S. Small Business Administration (SBA). The entire purpose of the SBA is to further the growth and development of small businesses throughout the United States. And that’s very likely how you have heard of the SBA because they help small businesses get access to capital.
Business loans are an excellent opportunity for business owners. But, before moving forward with one of these highly specialized loans, it is crucial to understand the costs and penalties associated with them. Most important, however, is the annual percentage rate (APR). The APR for a small-business loan will vary based on your qualifications and credit rating as a borrower, the type of loan you are applying for, and the lender you decide to work with. Loans from traditional banks or credit unions can have APRs that range from 4% to 13%. Online loan programs can have APRs that range well over 7%. But going for the lowest APR isn’t always the best solution. You need to consider the repayment structure, the size of the loan, and how you plan to use the funds from the loan.
What is an APR?
Annual Percentage Rate is the cost or charges of borrowing the funds for your business. APR basically quotes the cost of your loan as the percentage of the loan amount that you pay annually. So, if your loan has an APR of 9%, you would pay $9 for every $100 you borrow each year. If all other things are equal, the loan with the lowest APR is least expensive, but there are usually other factors to consider. The APR provides a starting point for the comparison of interest and fees from different lenders.
Common Interest Rates for Business Loans
Now that you perfectly know what an APR is, it is also vital to understand the different types of rates for business-specific loans.
- Interest rates – This is what you pay to your lender above and beyond the principal of the loan. Lenders do not willingly lend money for free. Instead, they charge interest so that they can make money from the people borrowing from them. The lower your credit score, and usually the lesser established your business, the higher the interest rate you will receive. Interest rates are usually calculated as either simple interest or compound interest. Simple interest is simply your principal multiplied by the annual interest rate multiplied by the duration of the loan. Compound interest is a bit more complicated as it recalculates the repayment based on your monthly payments.
- APR – This cost combines your established interest rate with the various fees and costs that are associated with your business loan. These fees are then aggregated into one number that determines the total cost of your loan.
- Factor rates – These rates are very similar to interest rates but are more often used for short-term loans no credit check and cash advances. Factor rates, however, are figures represented in decimal format instead of a percentage. In most cases, these are also easier to calculate as to get the factor rate, you simply multiply the sum of the credit by the factor rate to determine how much you will pay back to the lender.
Typical small business loan interest rates
In addition to your credit rating and other business debts, the type of loan that you apply for will impact the interest rate. Merchant cash advances, invoice factoring, etc., will come at a higher APR than bank or conventional loans. Therefore, it is recommended that borrowers consider more conventional financing options before selecting or relying on alternative products.
Here are some typical APRs that you can expect, based on the financial product that you are considering.
- Bank loans will usually have an APR of 4% to 13%
- SBA (Small Business Administration) loans will usually have an APR of 6% to 10%
- Online term loans will usually have an APR of 7% to 100%
- Lines of credit will usually have an APR of 8% to 80%
- Merchant cash advances will usually have an APR of 20% to 250%
- Invoice factoring will usually have an APR of 13% to 60%
Most banks will offer lines of credit and term loans, but alternative lenders often provide a wider variety of products, including specialty financings such as accounts receivable financing, merchant cash advances, or invoice factoring. However, these alternative financing products carry a higher interest rate, in most cases, than do lines of credit or regular term loans. Because alternative lenders charge higher interest rates, it is best to look at more traditional options first.
Typical fees for your business loan
In addition to understanding how the APR is calculated and the APRs to expect on various financial products, business owners should also be prepared for the fees that come along with borrowing. Business loans and other related financings usually will also come with a number of fees that drive the overall APR higher. These fees typically include application fees, origination fees, prepayment penalties, and late payment fees.
Qualifying for a business loan
It is easy to qualify for and be awarded a business loan. But, keep in mind that these loans come at a cost, especially if your credit rating is lower than desired. Banks qualify borrowers based on both business and personal credit scores, the annual revenue of the company, the length of time the company has been in business, the profitability of the business, and more. As most financial institutions have high standards for approval, many business owners couldn’t get approved business financing in the past. However, now with online lenders coming aboard to provide financing options to underserved business owners, or those with riskier credit ratings, business owners of all kinds can get loans. The difference is simply in the interest rate charged.
To meet the minimum requirements set forth by a financial lender, your rates and terms will vary depending on the credibility of your application. For any type of business loan related financing, you can assume that you will need a credit rating of 600 or higher. Annual revenue requirements will vary, but in most cases, annual business revenue of $100,000 or higher will be satisfactory. In some, but not all, situations, you will need to be able to provide proof of profitability, and your business will need to have been in operation for a minimum of 12 months.