Small businesses often need to access funds to buy new machinery, stock up on inventory, or even pay the day-to-day expenses. A business loan may be a solution. Of course, it comes with a price tag: interests. That’s understandable, after all, you have to pay for any service, material, and resource that you use to make your business work, right? But nobody likes to pay HIGH interest rates. This is one of the main factors that refrains business owners to borrow the funds they need. Don’t let high interest rates get on your way to grow your business. Simply, learn to lower them.
15 Ways to Reduce the Interest Rates on your business loan
1. Improve your personal credit score
If you have a low credit score, it will probably mean paying a higher rate of interest to the lender. Fortunately, there are ways to improve your personal credit score. You can boost your credit score by as much as 60 points in 60 days.
And since you’re on it, monitor not only your personal but also your business credit score closely. It’s possible to build business credit quickly by ensuring that you pay all your dues on time.
2. Refinance your high interest loans
High interest rates can be a drain on your financial resources. An expensive loan on your books can eat up a large part of your profits. If you find yourself in this situation, consider refinancing your debt.
This means paying off your older high-cost loan and replacing it with debt that carries a lower rate of interest. Don’t’ think it is impossible to do this. You may have borrowed money from a lender at a stage when your company had been in business for a short period. This could have meant paying high interest rates.
If you have paid your installments on their due dates for a year or more, you can approach a different lender to refinance your loan. You have a good chance of getting your loan application approved based on your payment record.
3. Shop around for the best rates
You must understand that interest rates can vary widely. An SBA loan could cost you less than 10% per year. Bank loans could be even cheaper. It’s possible to get one at a rate that is as low as 7%.
The rates that online lenders charge can range from very low to sky-high. If you have an excellent credit score and you meet all the lender’s conditions, your rate of interest could be 12-19%. But bad credit could mean that you have to borrow at a rate that is near 100%!
How can you borrow at the lowest cost? Ensure that you don’t jump at the first offer that you get. Contact multiple lenders and compare their rates. Don’t forget to read the fine print.
4. Start your search early
Many small business owners don’t begin looking for a loan until the last minute. If you are desperate for cash, you could be forced to borrow at high interest rates.
Remember that the best time to look for a loan is when you don’t need it. If you begin your search early enough, you will have time to build a relationship with your lender and negotiate and lower your interest costs when it comes the time to borrow.
5. Borrow from the bank or take an SBA loan
SBA loans and bank loans are probably your cheapest options. If you are eligible for one of these, you can be sure of reducing your interest costs.
But have in minds that traditional financial institutions have lengthy and complicated approval procedures. It could take months to get approval. If your loan application were turned down, you would have to begin your search all over again.
6. Offer the lender some collateral
Collateral is the security offered by the borrower to a lender. It could be in the form of the machinery that you use in your business or other physical assets. If you don’t repay the borrowed amount, the lender can seize the collateral and sell it to recover the loan amount as well as the accumulated interest.
A loan that is backed by collateral usually carries a lower interest cost than an unsecured loan. If you have any collateral to offer, you can save yourself from paying high interest rates. However, remember that a default could mean losing the asset that you have pledged.
7. Opt for a shorter term
When you are selecting your loan term, choose the shortest possible period. This will lower your interest cost.
This following table will illustrate this point:
|24-month repayment period||60-month repayment period|
|Rate of interest||2% per month||2% per month|
If you choose to repay over 24 months, your total interest payment will be only $2,689. Opt for a 60-month repayment, and your interest cost shoots up to $7,261.
It’s apparent that a shorter repayment period can save you a great deal of money. But you can choose to repay in 24 months only if you can afford it. The installment amount for a 24-month loan period is $529. For the 60-month option, it’s far less at $288.
8. Study the loan terms carefully
The loan agreement that you sign could contain a clause that stipulates that the interest rate will increase if a specific percentage of the loan remains unpaid beyond a pre-decided date. This bump in rates can push your interest costs up. Ensure that you repay your principal in time. You can avoid paying a higher interest rate if you do this.
9. Use a line of credit instead
Sometimes, you’re not sure whether you need to borrow funds. This can put you in a tricky situation. If you don’t take a loan and the need for money arises, you could be in trouble. On the other hand, if you do borrow and subsequently discover that you didn’t require the cash, you would needlessly have to pay interest.
What should you do if you face a situation like this? A line of credit can provide the answer. In this type of loan, a lender establishes a maximum limit against which you can borrow. If you don’t use the money, interest is not charged. When you draw against the line of credit, you will pay interest on the sum that you borrow.
10. Pay your credit card’s full statement balance
If you use your credit card to make company purchases, ensure that you pay the statement balance every month. Don’t carry any amount over to the next month.
11. Understand the fees and costs associated with the loan
Remember that the interest on a loan is only one of the expenses that you will have to bear. The loan agreement that you sign could specify several other charges and fees. This list could include:
- Late payment fees – this is a charge for delaying your monthly installment.
- Prepayment fees – if you repay your principal before it is due, you could have to pay a penal charge.
- Check processing fees – this is applicable if you pay your installments by check.
- Application fee – some lenders charge for telling you whether you are eligible for a loan.
- Processing fee – this is a cost that you could have to bear for getting loan approval.
- Closing fee – some lenders charge a consolidated fee for the loan that they provide.
Talk to your lender and get an idea about the total cost that you will be required to bear. Additional fees and charges will add to the cost of borrowing. This could turn out to be the same as paying high interest rates.
12. Get your financial statements in order
The lender who is considering your loan application will study your financial statements carefully. If your business is making healthy profits and has a steady cash flow, you will be eligible for a lower rate of interest. On the other hand, low profits could result in high interest rates.
It’s vital that you familiarize yourself with your company’s accounting statements. Don’t rely entirely on your accountant. As a business owner, you should be familiar with the firm’s financial statements.
13. Pay the lender on time
This is an essential precaution, but it is worth mentioning. Pay your monthly installments on time. If you do this, you will avoid paying late payment charges and fees and reduce your effective interest cost.
14. Take a minute to calculate how the lender calculates interest
Is the lender charging you simple interest or compound interest? It’s vital that you familiarize yourself with these terms. If you don’t understand them, you could pay far more for your loan than is necessary.
Here’s a quick review of the different ways that interest can be calculated:
- Simple interest – this method calculates interest by multiplying the interest rate with the loan amount and then multiplying again with the term of the loan.
Simple interest = loan amount X interest rate X number of term
- Compound interest – every installment that you pay includes interest as well as a part of the principal. The compound interest calculation takes this factor into account. So, your initial installment payments will consist of a higher proportion of interest and a lower amount of principal. As the repayment progresses, the interest component gets reduced, and a greater portion of the installment goes towards repaying the principal amount.
15. Pay the principal amount early
A good way to save on interest costs is to pay your outstanding loan amount as soon as you can. Of course, you can do this only if you have extra cash. However, if you do pay early, it is possible to save on the interest cost that you would incur in future.
There is one precaution that you must take. Find out if your lender charges a prepayment penalty. If they do, it may be advisable to continue paying your installments on the dates that they are due.
The Golden Rule About Interest Rates
Getting a loan with high interest rates doesn’t just mean that you’ll be paying more. If you borrow at interest rates that are unfair, you could be doing irreparable damage to your company’s long-term prospects.
Consider a situation where you take a loan of $25,000 that is repayable over five years. If the interest rate is 1% per month, your monthly installment will be $556. Now, let’s assume that instead of paying 1% per month, you have to bear an interest of 2.5%. How much extra do you think that you will have to pay?
The loan at a monthly rate of 1% will require you to pay 60 installments of $556. Increase the interest rate to 2.5%, and your monthly outgo rises to $809. That’s an extra $253 every month or over $15,000 over the life of the loan! Should you still accept a loan with such a high interest rate?
Well, the truth is, probably yes. Remember the golden rule about interest rates: the most important thing, even if they seem high, is that they are FAIR. Is the loan going to provide you a Return on Investment? Will the profits you earn surpass the cost of the loan? Before you reject a loan opportunity due to the high interest rate, do your homework, calculate your potential ROI, and try to answer the two previous questions. If the answer is “yes”, you should still consider the loan.
Small business loans from Camino Financial
There’s a simple way to control your interest costs. See if you qualify for a small business loan from Camino Financial. Here is what is on offer:
- Interest rates from 1% per month to 2.5%.
- Repayment in monthly installments. Choose a payment term of 24, 36, 48, or 60 months.
- A transparent loan process: no hidden fees (like transfer of paperwork), and no unpleasant surprises for borrowers. The only fee is the closing fee: between 5.0% and 6.99%.
- There is no need to provide collateral.
- There is no prepayment fee: you can pay off your whole balance at any time without penalty.
- After 8 months of timely payments, you can graduate to a loan with lower interest rates.
- Applicants with bad credit are eligible to apply.
You can use our calculator to estimate your monthly installment at different interest rates. Knowing the exact amount of your monthly payment will help you know if you can afford the loan and thus make an informed decision.
Once all the figures make sense, all that you have to do is to fill out our form. It will take only a few minutes, and we promise to get back to you within 24 hours. Applying will not impact your credit score.