Taking out a business loan is an inevitable task. Whether to keep up with expenses, purchase new equipment or simply expand your operation, loans help accomplish business goals by providing that extra capital you are looking for. However, nothing comes free of cost and whatever capital you borrow must be paid back to the lender along with interest in periodic payments, called repayments. The rate of interest applied to the loan is called loan rate and is one of the key factors in deciding how to choose a small business loan. Of course, loan rates vary depending on the purpose and type of loan you are looking for but there are some universal factors that help us understand how Startup Business loan rates are decided.
Here are the 4 factors that affect small startup business loan rates:
1. Credit Score: –
Credit score is basically a three digit number that shows lenders how likely you are to repay a debt. It usually ranges from 300 to 850 and is determined by how often you make payments on time as well as how many accounts you have in good standing. For conventional lenders such as banks, a credit score of 700 to 800 is required to provide an SBA (Small Business Administration) loan. However, if you opt for a small business loan from an alternative lender through any lending platform like Orumfy, you can get small business loans at lowest rates even with a credit score of 640.
2. Business Duration: –
Generally, a business that has been operating for less than 2 years is known as a start-up. Traditional banks do not give out small business loans to start-ups under the SBA regulations as they are considered high risk, so to get a loan from a bank you need at least two years of business operations. Alternative lenders however, provide loans even after three to four months of operations but offer higher APR (Annual Percentage Rate). APR is the year round cost of borrowing funds or the interest rate on the loan for the whole year. It is important to assess the long term impact of the APR on your business as higher APRs may hinder operations.
3. Business Revenue: –
Loan rates are determined by how much your business makes in a month/year which in turn determines how easily you will be able to make the repayments for the loan. As with all the other factors, banks require higher business revenue as compared to alternative lenders. The business revenue requirement also depends on the size of loan you wish to take out. The greater the loan the higher will be the repayments and higher must be the business revenue to maintain an average monthly payback amount. Alternative lenders may provide a loan even with annual revenue of $50,000 – $150,000.
4. Business Plan: –
All lenders and lending platforms require a detailed, solid and reliable business plan from your end to assure them of your commitment to the business. A business plan includes detailed planning regarding marketing and advertising efforts, financial projections for 3 to 5 years as well as competitor and market environment analysis. The business plan is your chance to persuade the lender to invest in your business.
As seen above, banks usually set higher requirements for giving out small business loans than alternative lenders. This is because banks usually charge a lower loan rate and offer bigger loans over an extended period of time whereas alternative lenders provide you with quick and easy financing.