Business Loan interest rate starts from 14.99% onwards per annum. However, other factors to influence the final commercial business loan interest rates decided by the lender that includes applicant’s profile and creditworthiness, business plan, credit score, required loan amount, repayment tenure, business vintage and profit, with various other financial aspects.
Business loans are designed to help small businesses and entrepreneurs meet their capital requirements. There are over 20 banks and financial institutions in the country that offer tailor-made business loans at attractive interest rates to suit your financial requirements.
Key Factors to Consider when comparing and choosing small business loans
When you’re securing a loan, you want to explore offers that meet your needs at most affordable terms. Here are some of the terms you’ll want to review when comparing each loan offer and different lenders.
- Interest Rate and APR
The interest rate is one of the first things you should consider. It is the percentage of the total amount you’re borrowing and will determine how much you officially end up paying for your loan.
As interest rate has a significant impact on your loan cost, you need to pay close attention to it. Check whether it’s a fixed or variable rate of interest. The former stays the same till the loan ends while the latter can change and possibly increase during your loan term.
If you’re borrowing money from a traditional government bank and have a good credit score, you may qualify for competitive rates and terms. If you have a bad credit score and you’re not in rush to borrow, consider working on your credit before applying.
You may likewise observe an annual percentage rate (APR), in your credit offer. It includes the interest rate in addition to loan fees, which can give you a better sense of the advance’s actual cost.
- Loan Principal
It is the amount of money you owe that will have to be repaid. The amount of interest you pay on your business loan is determined by the principal and can increase or decrease your total cost of capital. As it can allow you to get more specific about your debt, you should consider principal when comparing loan offers.
When you’re comparing business financing, you’ll have to decide whether you want a secured or unsecured loan. A secured loan is connected to a piece of collateral, like your real estate, invoices, or blanket liens. If you’re unable to pay your secured debt, the lender can take legal action and force you to sell the property you used as collateral to get their money back. On the contrary, an unsecured loan doesn’t require collateral, so you don’t have to worry about potentially losing your assets.
Secured business loans such as equipment financing, invoice discounting, and inventory financing, will probably have lower rates, higher borrowing limits, and longer repayment terms than unsecured loans.
Checking if the lender is charging any fees will help you determine how much money will cost your small business loan on the whole. Here are some of the common fees to keep an eye out for.
- Origination fee
It’s an upfront fee the lender charge for processing a new application. Typically, origination fees can range between 0.5% -1% of the loan and are often expressed as a percentage of the principal. For example, on a 500, 000 loans, an origination fee of 1% would be 5,000.
- Application fee
Some lenders charge application processing fee. Check if there are some lenders who are not charging application fees at all or go for someone who is charging it less compare to others.
- Late Payment fee
If there’s ever a delay in payment, you’ll want to check if your lender charges a late fee.
- Other fees
Also, check several other fees that your lenders may charge such as underwriting fee, closing costs, prepayment penalty, insufficient funds fee, loan packaging fee, referral fee, factor fee, etc.
How to compare Business Loans
1. Find the loan size you need
First off, you’ll be looking for a business loan that can provide you with the total amount of money you need. Different business loan providers have different minimum and maximum loan amounts, so you should find one that can provide you with an adequate level of finance.
For example, suppose you’re thinking about renovating your business, and it’ll cost $50,000. In that case, you’ll only want to consider business loans that allow you to borrow $50,000 or more.
2. Check the Loan Term
Once you’ve worked out what amount of money is needed, you should look at the maximum loan terms available. Generally speaking, the longer the term, the lower your monthly repayments will be.
However, don’t forget that you’ll need to pay back all of the money within this time. This means if you take out a business loan with a 24-month term, you’ll have to pay it back over 2 years.
3. See if it has a Fixed or Variable Interest Rate
After considering the loan amount and term, you should look more closely at whether your business loan will have a fixed or variable interest rate.
With a fixed interest rate, you’ll know exactly how much your repayments will cost you at all times during the loan. However, if the Reserve Bank of Australia changes our official cash rate, you could find yourself paying more than what you initially budgeted for.
Variable interest rates are a bit riskier, as repayments can change if the Reserve Bank increases or decreases our cash rate. Of course, the trade-off with a variable rate business loan is that you can benefit from lower repayments when the cash rate is reduced.
4. Check whether the Loan Is Secured or Unsecured
A secured loan is where you use something (equipment, residential or commercial property, business assets) as collateral. This means if you can’t make your repayments, the lender will be able to seize this asset and sell it to recover its losses.
On the other hand, an unsecured business loan is where you don’t use any collateral. Since you won’t be risking any of your assets, an unsecured business loan will typically have a higher interest rate than a secured one but is more accessible if your business credit score isn’t super high or your owned assets are limited.
5. Confirm if you can make extra loan repayments
The option to make extra loan repayments can help reduce the amount of time it takes to pay off your business loan.
If you can make extra repayments, you’ll be able to chip away at the principal value of the loan each month. This means less interest needs to be paid overall, and this will reduce how long it takes to pay off what you owe.
6. Consider loans with split, switch, and redraw facilities
If having a great deal of flexibility with your business loan is important to you, then additional features like split, switch and redraw facilities might be worth considering.
A split loan facility gives you the option to pay part of the loan on a fixed interest rate and part on a variable interest rate. This could be useful if your business is doing well and you want to pay as much off as quickly as possible.
A switch facility lets you change how your repayments are structured during an agreed period without penalty. So, if interest rates go up or down (or you need more or less money), this could be useful.
Finally, a redraw facility lets you withdraw any additional repayments that you’ve made if you need those extra funds within the same year. This can be useful if you have a large business tax bill due at the end of the financial year, but your business needs cash flow.
Tip: A redraw facility can be a great option to pay off existing debt without the accrued interest and attack new debt at a lower rate.
7. Evaluate Fees and Charges
When comparing business loans, make sure you also look beyond the interest rate and compare what fees and charges will be included.
For example, a lender who doesn’t charge establishment fees will appear a lot more attractive if another lender has a loan with an establishment fee of $2,000. Consider lenders who offer low or no application fees.
8. Don’t forget about Early Repayment Fees
Once you’ve decided on what lender to go for, don’t forget that once it comes time to pay off your business loan early, they may charge an early repayment fee. You’ll want to take this into account when working out what you can afford.
9. Look for an Easy Application Process
If you compare business loans and find a few that are similar, then one additional factor to consider is the ease of applying. Getting a business loan from a bank can sometimes be cumbersome because of the many checks and balances they perform. At the same time, non-bank lenders can generally offer a streamlined application process.