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Home Insights & Advice How to get a better interest rate on a business loan

How to get a better interest rate on a business loan

by John Saunders
18th Aug 20 11:03 am

When you need financing for your business, you might decide to get a business loan. What you might not know, however, is that a business loan can be a very expensive undertaking. This is because the interest rate might be a bit high, which would make your business struggle to repay it. The best thing you can do is try to get a better loan rate from the lender. Remember that the interest rate is charged depending on how much risk you pose to the bank. A higher interest rate means the bank has assessed you as having a high chance of defaulting, and vice versa. So, to reduce your interest rate, you should reduce the risk associated with your business. Here’s how.

Boost your profitability

Your revenue and profits are a very important factor when getting a business loan as the bank or lender will definitely look at those numbers. Highly profitable businesses get better interest rates because lenders assume that they will have an easy time making the repayments.

Banks and lenders will look at your history of profitability, how much profit you are making right now, and whether these profits are increasing or decreasing. The bank will also consider any debts you owe.

Improve your credit score

Your personal credit history is often considered when getting a business loan depending on the legal establishment of your business. For example, if you are a sole proprietor, you will be responsible for the business and if you establish an LLC, your business will be liable for the loan.

If you are asking for a small business loan, however, your personal credit score will come into play. Your credit history depends on your repayment history and rates, how much debt you are carrying right now, plus how much credit you have and how much of it you have used up.

A lender will likely look at your business’s credit score to determine if it has a good history of repaying lenders.

If you have a low credit score, ensure you find ways to improve your credit score. Alternatively, you can look into getting a bad credit loan, but make sure you’re borrowing responsibly and a bad credit loan won’t hurt your credit further

Shop around

Although you might have a preferred lender, it is always important to shop around to compare the interest rates offered by different lending institutions. It is also a good idea to check online to see if you can find a lender who offers a sustainable and affordable small business financing rate. Once you know what rates are available, you might be able to negotiate a better rate with your lender of choice.

Build good relationships with lenders

Banks routinely offer lower interest rates to customers who have been good clients over many years. This includes people who have had a long relationship with them and who have a good repayment history.

It is therefore a good idea to try to cultivate good relationships with different lenders. This can be done by meeting your banker regularly, submitting documents when requested, being transparent about your business, and making loan repayments before the due date.

Getting a lower interest rate on a business loan should be something every business aims for. This is so that your business is not saddled with a debt it cannot repay.

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