How Can You Lower the Interest on a Business Loan?
Anytime you have a business loan, you want to make sure you get as low of an interest rate as possible. Remember that even a tenth of a percentage point can have a significant impact over the life of the loan. This is especially true if your loan is for a larger amount or has a long term.
The difference in savings can boost your profits or just keep your business in the green. But how can you lower the interest rate on your business loan?
Improve Your Business Profitability
While lenders will look at many factors, the profitability of your business is one of the biggest things they can consider. To a lender, your profitability and financial strength go hand-in-hand.
If your company is profitable, lenders feel that you have a better chance of repaying the loan. Since you are less risky, they reward you with a lower interest rate. Of course, being profitable is also good from a business standpoint.
To take advantage of this tip, try to reduce outstanding debt and work to make healthy, sustainable profits.
Secure the Loan with Valuable Collateral
The interest rate that you receive for a business loan depends on the amount of risk you pose to the lender. Offering valuable collateral is one way to reduce that risk, as the lender would take the collateral if you don’t pay.
However, this only works if you have valuable collateral. One example would be if the business owns a building.
Boost Your Credit Score
In the case of a smaller business loan, you may be surprised to learn that lenders treat the loan similarly to personal loans. As such, your personal credit score will play a role in the rate that you get.
While larger business loans are treated differently than personal loans, your credit score still plays a role. Lenders will use it to gauge how dependable or risky you are.
The bottom line is that if your credit score is better, lenders are likely to offer you lower interest rates for your business loan because they will see you as more financially reliable.
Create a Relationship with the Bank
You should never underestimate the impact of building a relationship with the bank. This doesn’t mean you have to create a personal relationship. However, it does mean you will notice benefits from having a working relationship with them.
Essentially, if you have been a client of a given bank for a long time, consider turning to them for your business loan. You can make your relationship with your bank even better by delivering documents, being transparent, and meeting them regularly.
Plan to Refinance
While refinancing won’t improve your initial interest rate, it can help you a little down the road when your business is already established. This is also a good option if you have multiple business loans, as you can frequently combine them into one.
When you refinance, you will be more likely to be able to take advantage of some of the above points. For example, you will have hopefully shown your company has steady profits, or you may own a business space or have other collateral. That will also have given you time to build a relationship with the bank if you hadn’t already done so.
As mentioned, those factors will help you get a lower interest rate. Essentially, this tip involves putting up with higher interest rates for a short time until you can take advantage of the other tips on the list.
Consider If a Line of Credit Makes More Sense
Although it is not always the solution, you may want to consider if a line of credit makes more sense than a business loan. The bonus of this is that lines of credit frequently have lower interest rates. If you use a revolving line of credit, you also get the benefit of not having to pay interest on the money until you need it. By contrast, you would have to pay all interest on a loan.
However, this is not an option for every business. For example, it may not make sense if you need the lump sum from the loan at once. Moreover, it’s possible that the interest on a line of credit won’t be significantly better than that on a business loan.