Understanding the Terms of Your Small Business Loan
Small business loans seem complicated, but they don’t have to be. It’s overwhelming operating a business with little to no cash flow, especially if your existing debt consumes you or you experience the occasional dip in business.
From interest rate to term length to monthly payment amount, there’s a lot to try to understand. Not to mention, finding the one that’s right for you and your business is time-consuming.
However, if you take some time to do some research, you will feel much more comfortable with your ability to choose the right loan. Read on to educate yourself on the various terms available to you and how they work.
Types of Small Business Loans
There are three common types of small business loans. SBA 7A loans and SBA express loans help you grow capital or refinance an existing loan. CDC/504 loans are designed for purchasing assets like machinery, equipment, or real estate.
Qualifying for a Small Business Loan
There are some qualifications your business must meet to receive funding, especially at a prime rate. While there are exceptions and startups are intermittently accepted, these are the general requirements:
- Operational for at least two years
- Personal credit score of 680 or higher
- Need at least $30,000
- You have at least $50,000 in revenue in the past twelve months
- Your business is profitable
Borrowers who meet these requirements can obtain a pre-qualification for as much as $350,000. It typically only takes minutes to apply, and some lenders offer same day loans and other fast business loans.
Interest rates constantly change as a product of the current market. As of March 2018, the maximum interest rate on an SBA 7A loan ranges from 6.75% to 9.25%. Interest rates for CDC/504 loans range from 4.71% to 4.93%.
These maximum rates come from the Small Business Administration (SBA) and fluctuate based on the current market rates. As the market rates change, so do the maximums. Other factors like term length, total amount borrowed, and your credit score can impact your rate as well.
Interest Rate Factors
Three factors determine your maximum interest rate on SBA 7A loans:
- Your base rate
- Term of your loan
- Size of your loan
Loans longer than seven years have higher maximums than shorter loans. Loans for more than $50,000 have lower maximum rates than loans for $25,000 to $49,999 with other similar terms. As you would expect, loans less than $25,000 have rates even higher.
Fixed vs. Variable Rates
When choosing between fixed or variable rates, you should take a few things into consideration. Fixed rates remain constant for the life of the loan. You don’t have to be at the mercy of market fluctuations in or out of your favor. Variable interest rates change at intervals like monthly or quarterly, and they don’t always change for the better.
Often people choose a variable interest rate because it offers a cost savings now. However, it may not offer long-term savings over the life of the loan. While it can never be more than the maximum allowable rate, keep in mind those rates constantly change, and you never know what they could be tomorrow.
You have to consider the other costs of getting a loan outside of just the interest rate. Many banks and other lenders charge an application fee or origination fee. It covers any costs the financial institution incurs from paperwork, underwriting, processing, or any other work they have to do to get you approved.
This fee is arbitrarily set by the lender, so it doesn’t rely on market rates. Shopping around to get the best terms on a small business loan is a great idea, but also pay attention to these other fees to make sure you get a good deal.
Some lenders also charge a guarantee fee of roughly 3%. It’s a lender’s way of making a profit in the event you default. It’s an extra measure of protection against each risk factor involved in issuing large sums of money to borrowers.
SBA Rates vs. Interest Rates
SBA rates differ somewhat from commercial loans. While the bank is not technically allowed to limit your application for financing, they typically don’t like loaning less than $300,000 to small businesses. To minimize risk, the bank will charge a higher interest rate on smaller sums of money to make it worth their time and effort. This makes the loan more profitable for the bank.
Paying it Back
Different term lengths, as well as payment regulations, vary by the financial institution as well as on the loan amount. Usually, banks offer longer term lengths for higher sums of money. The longer your term length, the lower your monthly payment on the same amount.
Sometimes you also need to be aware of any prepayment penalties. Financial institutions want to make sure they make as much money as possible, again, to reduce their risk. They may charge a fee if you want to pay your loan off early. Charging this fee allows them to make up for some of the interest they will lose for the remainder of the term of your loan.
Prepayment penalties may be worth it if they save you money in the long run. Paying the penalty to get out of paying interest on a loan that still has a few years left to maturation is something to consider if you are able.
Quick Loans Direct can help you secure financing for your small business and help you understand the terms available to you. They offer online applications and quick turnaround. If you need a small business loan, take the fast and easy approach today.