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Updated on Tuesday, January 22, 2019
Small businesses often require additional financing. From funding equipment purchases to funding renovations, business loans can be put to a variety of purposes. However, interest rates differ depending on whether you are looking for short- or long-term financing.
How are business loan interest rates factored?
Loan amounts and rates are estimated based on your creditworthiness. How is creditworthiness assessed? Banks and many lenders first look at your ability to repay your loan. Businesses need to show that they can meet their expenses while also making loan payments. Managers have to show that they are competent as well, particularly when they are applying for a business loan to start a new business. This is one reason that applicants are sometimes required to provide their resume when making a loan application.
Owners also have to show that they have enough of their own money at stake in the businesses. Business owners are required to demonstrate they have a certain amount invested for every dollar provided by the loan. Finally, banks also look at an applicant’s credit history. Both personal and business credit history is reviewed before lenders settle on an amount to lend and the interest rate to set.
The 4 types of low-interest business loans
- SBA loans
- Traditional bank loans
- Online loans
- Business lines of credit
The U.S. Small Business Administration does not fully set interest rates on loans because it does not make loans itself. Rather, it secures loans issued by banks to help small businesses. However, it does set caps on maximum interest rates. The SBA has different maximum rates it sets depending on the size of the loan and the type of loan.
Bank loans come in two forms: unsecured and secured loans. Unsecured loans, meaning those that are not secured by business assets or cash deposits, carry higher fixed rates. Secured loans carry the lower interest rates of the two because they require the borrower to put up collateral.
Alternative lenders found online often offer smaller loan amounts than traditional banks, but can still help to fund a business. Interest rates are applied on both short- and long-term loan rates, though the rates on short-term loans may be higher.
Business lines of credit operate similarly to traditional bank loans. Credit lines can be either secured or unsecured. Just as with loans, unsecured credit lines carry higher interest rates while secured credit lines carry lower ones.
Short-term vs. long-term rates
Small- and medium-sized businesses don’t often require long-term financing. Short-term loans are often sufficient to help cope with difficult financial periods. These loans also help businesses stay out of long-term debt. However, the interest rates are also higher on short-term loans. Banks use the higher interest rates to collect back on their loans in case a borrower defaults.
Long-term loans require individuals to pay back their lender over a longer period. Interest rates are usually lower because the borrower often ends up paying back more on the loan overall when compared against a short-term loan. Because borrowers end up paying for a longer period, the smaller loan rate adds up over time to a larger amount paid back to the lender.
Borrowers also have to pass more stringent requirements to get long-term financing. Banks assume a borrower has a lower risk of defaulting when they qualify for financing over longer periods. The lower risk qualifies borrowers for lower rates because banks decide the borrower is more likely to pay back the full amount.
Where to shop for low-interest business loans
There are many lenders that offer small business loans and finding one can sometimes be confusing. Fortunately, LendingTree offers an online small business loan marketplace. LendingTree, which owns MagnifyMoney, connects small business owners with a network of small business lenders in one convenient destination. This marketplace helps to simplify the process of shopping for business loans and makes it easier to find loans with low interest rates.
The hardest part about applying for a loan through the marketplace is the work of gathering the appropriate paperwork. You’ll need to provide the following:
- Two years of personal and business tax returns
- Bank statements
- Recent balance sheet
- Legal filings showing ownership
- Recent profit and loss statements
- Business license
- Business plan
- Information about existing debts
The form you fill out will vary depending on whether it is for short- or long-term financing. Financing for certain types of operations, like buying new equipment, are also simpler and require less documentation. Before you apply, you’ll need to answer the following questions:
- What type of business you own
- How much you need to borrow
- When your business started
- Your annual revenue
- The name of your business
- The ZIP code in which you operate
- Your name
- Your credit score
- Your contact information
Afterward, you’ll be given your funding options. This will give you a chance to select from one of LendingTree’s funding partners, who will consider your information from the form you have just completed.
The bottom line
Depending on whether you choose short- or long-term financing, you will have to pay different interest rates. Longer term loans typically come with lower rates, but you will often end up paying more over time. Fortunately, you can compare lenders and rates using the LendingTree small business marketplace.
This article contains links to LendingTree, our parent company.