No matter how small the operation, your business needs capital. Securing a good loan means finding both an affordable rate, and a policy that fits your business needs. The interest rate you negotiate can be the difference that either makes or breaks your profit margins. Unfortunately, the process is not as simple as merely finding a cheap interest rate. Before getting started, read these five tips to give you the best chance of finding a good loan:
Look for the APR – When it comes to small business loans, look for the annual percentage rate first. It can be tempting to just find the cheapest interest rate possible, but that doesn’t always show the true price of the loan like the APR does. APR includes all fees tied to a loan, and this includes your contract fees and maintenance costs. Avoid feeling uncertain and misguided by always asking for APR first.
Know what to expect –It pays to appear knowledgeable when meeting with your lender. By understanding what the standard asking rate for a business loan is, you can prepare yourself for negotiation. The Small Business Administration sets the maximum that a bank can charge on a loan at 8.25%. However, in some cases the maximum is set at 5.57%. What it comes down to is how much money you are asking for, and your history as a borrower. Tip; use a business loan calculator to figure out the repayment schedule to see if your business can handle the payments.
Fixed rate loans – Always choose a fixed rate loan over variable. When running a business, it is beneficial to know well in advance how much you will be paying for credit. Choosing a variable interest rate plan can leave you vulnerable to the tides of the market. By securing a fixed loan with an interest rate at say 6% or less, you can help ensure months or even years of smooth business. Not to mention, fixed loans will help you secure a low interest rate the next time you need one by making it easier to pay of your debt now in a predictable and timely manner.
Negotiate –The rates listed thus far are a maximum, not a minimum. Depending on your credit history, banks can still choose from one of a few different market level interest rates. These include the prime rate, the one month LIBOR rate, and the SBA PEG rate. These rates are 3.50%, 3.0% and 2.38% percent respectively. Currently, these rates are at an all-time low thanks to the low interest rates set by the Federal Reserve. Never underestimate the power of negotiation. If you believe you are trustworthy, and can prove it, show your provider.
Consider some plastic – Given the higher rates of interest, using a credit card can seem irresponsible. While we do not recommend funding all of your operations with a credit card, ‘Access’ credits cards with small business benefits can end up saving you more than an affordable rate loan rate can. Not to mention, credit cards make it easier to keep your total debt expenditures to a minimum. Some small business owners have discovered credit card companies that offer 5% rewards on business related transactions.