August 29, 2013
10 Things Business Owners Should Know About Commercial Bank Loan Interest Rates
Running a business often requires amounts of capital which may not be feasible given your cash-flow situation. Even when cash-flow is not a problem or a business has large cash reserves, it’s often more practical or makes more financial sense to take out a loan for large expansion or growth opportunities. After all, a good growth opportunity will usually return far more than any fees and interest incurred in a loan. But before you walk into a bank, here are ten things every business owner should know about commercial bank loan interest rates.
1. Some Bank Loans Require Early Payment
Even though your long term loan might have a maturity date of 30 years, some lenders require early payment or requalification on loans in as few as 10, 5, or even one year.
2. Interest Rates Jump as Loan-to-Value Increases
This shouldn’t come as a surprise to anyone, but for buying large assets, the amount you pay in interest increases greatly as the Loan-to-Value (what percentage of the assets value is being financed) increases.
3. You Might Need Your Spouse On-Board
Small business owners whose spouse or significant other owns 20% or more of the company might need to co-sign on loans that are backed by the SBA, as will any other partner meeting the 20% equity rule. Most SBA guaranteed loans also require the principal to pledge his/her home as collateral.
4. Some SBA Guaranteed Loans May Have Higher Interest Rates
Commercial bank loan rates won’t necessarily be lower with an SBA guarantee, but lenders might be more amenable to extending the term on the loan.
5. Smaller Loans Have Higher Interest Rates
Commercial bank loan interest rates sharply increase for loans under $100,000.
6. Commercial Bank Loan Rates Are Usually the Cheapest
Some businesses might need a non-traditional lender to qualify for a loan, but loan interest rates at commercial banks are usually at least a point or two lower.
7. Getting the Best Commercial Bank Loan Rate Means Lowering Risk
The more you can lower risk, the better your interest rate will be. Things you can do include having a solid growth plan, investing in detailed market research, or letting a larger business own a minority percentage in your venture.
8. Larger Banks May Offer A Better Interest Rate, But…
Smaller and community banks can often work with a borrower to negotiate rates, and are more likely to offer commercial loan extensions.
9. Shopping Around Pays Off
The difference between the lowest offered commercial bank loan interest rate and the median rate can be as much as half of a percentage point, which can mean huge savings if you shop around.
10. The Most Important Factor For A Good Commercial Bank Loan Rate Is…
A strong relationship with your bank. Take the time to meet with a business banker before you need to ask for a loan. If the bank is familiar with you and your business, chances are greater that you will be able to jointly negotiate the best outcome for your business.