Three out of every five small businesses use loans to finance their operations at one point or another, according to Harvard Business School.
Do you find yourself in that majority? If so, here are six things you need to keep in mind before you apply for any old commercial loan for your small business:
1. Interest rates can be variable or fixed.
When shopping for a loan, it is critical to consider the kind of interest rate you’re most comfortable paying. For the most part, you have two choices:
- A variable interest rate mirrors the market. When market interest rates go up, payments go up; when they go down, payments go down.
- A fixed interest rate stays the same over the life of the entire loan.
Generally speaking, if you suspect interest rates will go up in the near future, you’d be better off looking for loans that have fixed interest rates. On the other hand, if you think rates will decrease, a variable interest rate may be more desirable. But be warned that your payments will shoot up if and when market interest rates increase.
For what it’s worth, studies have found that, on average, borrowers are likely to pay less interest when choosing variable interest rates. But everyone’s situation is different, and there’s no way to be certain you’d pay less by choosing a variable rate. Use the length of the loan you need and your assessment of the economy to guide your ultimate decision.
2.There are a ton of fees that are tacked onto loans.
As you begin your search for commercial financing, remember that interest rates aren’t the only numbers that matter. There are lots of fees tacked on to many loans. There’s a borrower origination fee. There are closing costs. There are underwriting fees. The list goes on and on.
Be sure to ask lenders what kinds of fees are hidden in their commercial loans. Shop around and see which lender’s fees are most reasonable.
3. Pay attention to the annual percentage rate (APR).
It’s important to shop interest rates and fee rates. But if you want the easiest apples-to-apples comparison between two different loans, look at APRs.
APRs are calculated by adding interest rates and fees together. If you have a 5% interest rate and 2% in fees, for example, you’ve got a 7% APR.
4. Your personal finances can affect your rates.
Think your personal finances don’t have any impact on whether your small business can secure a commercial loan? Think again.
Financial institutions will usually look at a small business owner’s credit history, tax returns, and personal financial statements before deciding whether to finance a company. How well you manage your personal finances can have a direct effect on the interest rates you lock down.
5. Bank loans can be particularly difficult to secure in the first place.
Even if your business is doing pretty well, it can seem impossible to secure a commercial loan from a traditional banking institution.
Banks typically won’t loan money to small businesses unless they’ve been in business for at least two years. Beyond that, businesses need to generate $250,000 in revenue annually and have positive cash flow. The business’ credit score—as well as the business owner’s personal credit score—are also taken into consideration.
All told, this means that only half of small businesses that apply for loans actually get financed by banks.
6. There’s no shortage of lending options available.
Having trouble getting a bank to sign off on a commercial loan for your small business? You certainly aren’t alone, so don’t let it discourage you. The good news is that there are tons of alternative lenders out there, and thanks to the Internet, it’s easier than ever before to connect with them.
If you’re a small business owner who’s looking to secure some financing, consider applying for a small business loan through an alternative lender. You’re likely to qualify for a loan even if you have bad credit.
Commercial loans can seem intimidating to those who aren’t familiar with them. By doing your due diligence and researching the different financing options that are available to your small business, you’ll make the right decision. Good luck!