5 Tips to Get a Good Interest Rate for a Small Business Loan

A good interest rate on a small business loan will largely be based on the credit score of the business or business owners. While limits and terms can be based on income or revenue, the interest rate is typically largely based on credit score. For that reason, a business should improve its credit score before seeking a loan. Other tips can be tried once these options have been exhausted.

#1 Make Loan Payments for Two Years

Two years is a typical statute of limitations on missed payments. This means a late payment on any debt will largely go off a credit score within 24 months. If a business can make all debt payments for two years running, that business will see a huge increase in credit score and a lower interest rate on future loans. If a business has a bad score, waiting just two years to seek a new business loan can solve the problem.

#2 Reduce Credit Balances

The balance on any existing credit line can negatively affect a credit score. It is best to reduce all balances to below 10% of the total limits on the credit line. Further, the overall debt can be reduced by closing any loan that does not have an early payoff penalty. Even paying the penalty can be worth the credit reward if a new loan will be sought immediately.

#3 Secure the Loan

If credit improvements alone cannot secure a low interest rate, try using collateral to secure the loan. Secured loans are less risky for the lender. The lender rewards this lower risk with a lower interest rate. The borrower does assume the higher amount of risk, which can be intimidating. However, with business loans in the hundreds of thousands of dollars, assuming the risk can be worth the interest savings.  

#4 Save for a Down Payment

A down payment will reduce the overall size of the loan. This will not directly lower an interest rate. However, in the long run, this action will reduce total interest payments. With a smaller principal sum being assessed for interest charges, the business can save money even at a high interest rate. S larger down payment can also provide lender confidence to potentially reduce the interest rate or gain better terms on the loan. 

#5 Budget for High Monthly Payments 

In general, longer loans come with higher interest rates than shorter loans. The more a business can afford to pay off each month, the shorter the term of the loan, and the lower the interest rate quoted. Not all businesses will be able to afford very high monthly payments. Smart business owners, though, especially those who are taking an initial start up loan, will want to reduce the principal debt burden as fast as possible through high payments. Implementing budgeting methods, such as providing equity instead of cash bonuses, can free up more liquidity to repay debts. Business owners can also reduce their personal salaries and instead allow the business equity to grow in order to reward themselves for the work.