Borrowing money for your business means having to pay interest on your loan. Determined by several factors, rates of interest range from the lowest (currently 3.25%) to much higher figures for smaller businesses.
How Do They Work?
It is becoming more and more common in the U.S. for businesses to borrow money. This has led to the development of various borrowing options, each with its own unique rate of interest.
The Prime Rate
The best known, and the lowest, of these is the prime rate. Currently set at 3.25%, this is a standard rate offered to clients with little or no chance of defaulting – typically large corporations accepting short term loans. Set by the banks themselves, the prime rate can be periodically adjusted to reflect changes in the economy, and can also be increased with customer risk.
The Discount Rate
Other important interest rates include the Discount Rate. This is the rate imposed by the Federal Reserve on loans taken out by commercial banking institutions. It is used to determine the present value of a cash flow set to happen at some point in the future.
Other Interest Rates
The Commercial Paper Rate is a short term discount bond which often matures in less than six months.
The Treasury Bill Rate is a risk-free bond offered to clients at a price lower than its value when retrieved after maturity.
The Treasury Bond Rate holds off from maturing for at least twelve months, commonly lasting 10 to 30 years. It varies depending on its maturity.
Finally, the Corporate Bond Rate varies depending on the time to maturity (usually 20 years) and how risky the loan is.
It is illegal for lenders to charge above a certain percentage of interest on loans, and they are prevented from doing so by state usury laws. These laws vary from state to state, with different rules applying to businesses and personal clients.
Because the size of your business determines the risk factor of defaulting on your loan, the general rule is that, the smaller your business, the higher rate of interest you will have to pay. To measure this risk, banks analyze your finances in a process called underwriting.
They will ascertain your capacity to pay for your expenses based on your revenue, and how likely it is that you’ll be able to continue to do so should additional loan charges be incurred. They will also look at your credit history and collateral, as well as take into consideration your access to capital.
As a first time client, particularly if you own a small business, to be accepted for a bank loan you would ideally have to show two years of profitable history and a personal credit score of 660 or above. You would also need to take out a loan of at least $30,000, and have the collateral to provide a personal guarantee.
The most important factor influencing interest rates is supply and demand. Rates will rise with increased demand for credit. So, in an economic climate in which loan demand is high, banks are able to capitalize on borrowers’ need for money. Conversely, in times of economic crisis, banks may lower interest rates to encourage businesses to take out loans.
Another factor is inflation. Interest rates rise with inflation because lenders demand higher forms of compensation for the reduced future purchasing power of the money they will be repaid.
A third factor influencing interest rates is how confident the lender is that the money, including interest, will be paid fully and on time. The less assured the lender is that the borrower will adhere to the arrangements of the loan, the higher rate of return or risk premium they will set.
Other factors include political gains, international forces and interventions by the national authorities.
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Top 10 Providers
There is a wealth of loan providers available to any size or type of business. To decide which is the right one, there are several factors a borrower should consider. For example, the types of businesses to which the provider loans.
Some might deal specifically with small, online businesses, rather than those more established and offline, while others will lend to limited companies only. Maximum loan size and term length can also vary greatly between providers. Some may require you to have at least two years of filed accounts, while, for others, your trading history might not factor. Here’s a list of the top ten providers:
- TMG Loan Processing
- Currency Capital
- Lending Tree
- Business Finance Advance
- American Capital Group
- Lending Club
- Swift Capital
- VMC Capital
TMG Loan Processing
Specializing in small business loans, TMG Loan Processing offer short term loans of up to $250,000, and long term of up to $500,000.
Founded to provide small businesses with a number of financial options, IMCA Capital offer transactions of up to $1,000,000.
Lending Tree offer a wide range of loan services, so you can easily compare the prices of lenders.
Business Finance Advance
With a rate as low as 12.99%, BFA’s loans go up to $2.5 million per location.
American Capital Group
American Capital Group’s mission is to make commercial equipment available for small to mid-sized businesses.
Lending Club offer one to five year terms, with amounts ranging from $5,000 to $300,000.
Providing funding from $5,000 to $250,000, LendVantage’s terms range from four to 24 months.
Swift Capital offer six to 12 month terms, with amounts ranging from $5,000 to $200,000.
Biz2Credit offer short term loans of up to $50,000, tailored for startups, and longer term loans of up to $2 million.
VMC Capital offer loans ranging from $5,000 to $500,000 to businesses older than three months.