A good interest rate on a small business loan would be largely be based on the credit score of the business or the business owners. While the limits and the terms are always based on income or revenue. The interest rate is however typically largely based on the credit score. For that reason, a business should thus improve its credit score before seeking a loan. Other tips can thus be tried once these options have however been exhausted.
How to get a good interest rate for the small business loan
Make loan payments for two years
- Two years is a typical statute of the limitations on the missed payments.
- This means a late payment on any kind of debt would largely go off a credit score within 24 months.
- If a business can make all the debt payments for the two years running, businesses get a huge increase in the credit score. Also, a lower interest rate on future loans. If a business has a bad score, waiting for just two years to seek a new business loan can thus solve the problem. One can take the business loan with co-applicant also to reduce the burden.
Reduce Credit Balances
- The balance on any existing credit line can negatively affect a credit score.
- It is best to reduce all the balances to below 10% of the total limits on the credit line.
- Further, the overall debt can be reduced by closing any kind of loan that does not have an early payoff penalty.
- Even paying the penalty can be worth the credit reward if a new loan would be sought immediately.
Secure the Loan
- If the credit improvements alone cannot secure a low-interest rate, the borrower must try using any kind of collateral to secure the loan.
- Secured loans are thus less risky for the lender.
- However, the lender rewards this lower risk with a lower interest rate.
- The borrower also does assume a higher amount of risk, which can be intimidating.
- However, with this kind of business loan in the hundreds of thousands of dollars, assuming the risk can be worth the interest savings.
Save for a Down Payment
- A down payment would reduce the overall size of the loan.
- However, in the long run, this action would reduce the total interest payments.
- With a smaller principal sum which is being assessed for the interest charges. The business can save money even at a high-interest rate.
- A larger down payment can however also provide the lender confidence to potentially reduce the interest rate or either gain the better terms on the loan.
The budget for High Monthly Payments
- The longer loans come with higher interest rates.
- The more a business can afford to pay off each month the shorter the term of the loan will be. Not all businesses will be able to afford very high monthly payments.
- Smart business owners are those who take an initial start-up loan. They want to reduce the principal debt burden as fast as possible through the high payments.
- Implementing the budgeting methods such as “providing the equity instead of the of cash bonuses” can free up more liquidity to repay debts.
Things to consider before taking a business loan
The start-up costs of a business are considered as a huge obstacle for entrepreneurs with a little amount of cash. The borrower must be prepared to demonstrate to a lender that the borrower is creditworthy and he must also be prepared to run a successful business. There are also a few more things that the borrower should know about getting a business loan. There are various facts about business loans.
Your Personal Credit History
- If this is the borrower’s first business, then he doesn’t have any kind of established business credit. So the lenders are however going to base the creditworthiness on the borrower’s personal credit history.
- If the score is not good then the borrower is required to make some of the improvements before he applies for a loan. There can be many reasons behind the rejection of the business loan application.
- If his credit history is minimal want to establish some of the new credit. After six months the borrower would raise his score and also shows an additional payment history.
- If he already has credit, but his score is low, he needs to find out why. Perhaps his balances are too high.
- He should not carry a balance of over thirty percent of the limit.
The Business Plan
- The most important step in applying for a small business loan is creating a good business plan.
- A business plan must thus be well thought out and also well presented.
- The borrower is also required to research how feasible his business can be.
- It must explain
- How much money is needed for the business?
- How will the borrower spend the money? and
- How will he repay the loan amount?
- The borrower is required to provide his business financial statements and corporate documents.
- The main thing is to convey the mission statement properly. And then provide the lender with the supporting documentation to see that he is committed to the business.