You are here: Home » Blog » Financing Solutions » How Business Loan Rates are Determined

How Business Loan Rates are Determined

by Robert Wagner on October 3, 2010

Have you applied at multiple lenders for a small business loan? Were you wondering exactly what they use for criteria to determine what the rates and terms will be? You’ve probably already figured out that a prime rate is a non-existent number when it comes to business financing, so how exactly do the banks know what your interest rate is going to be and how long they are going to allow you to keep their money before it all has to be paid back?

Small Business Loans and Personal Guarantee

The determining factors that banks and credit unions use to make the decisions about your business loan are what are known as potential risk assessments. Most small businesses loans will need a personal guarantee, so a loan officer is going to look at a piece of paper that will tell him everything he needs to know about who you are and what your ability to make the payments is. If that ability appears to be questionable, they will charge you a high-interest rate, perhaps even a processing fee. Though there is a new law in effect now that limits the amount of that fee, you’ll still pay dearly for a poor credit history.

Is it fair that some pay higher interest than others? This question is often debated, and there are two distinct and separate opinions about it. Some say yes because you should pay the price for a poor payment history, but others claim that outside factors often affect a person’s ability to pay on time, and those factors change. In the most recent economic crisis many otherwise responsible business owners fell behind on bills and mortgage payments just like the rest of us did.

Shop Your Loan to Different Lenders

The bottom line for lending rates is that the banks hold all the cards except one. There are multiple lenders out there who can offer a better deal. It’s important not to take the first offer when you’re looking for some extra working capital funding. Use that offer to convince someone else to do business with you. Competition drives interest rates and processing fees down, something you should take advantage of. The best deal may not be at your local bank or credit union. It could be online someplace a thousand miles away, perhaps through a non-traditional lender, you never considered.


Previous post:

Next post: