What Factors Influence Your SME Business Loan Interest Rate?

If you are a small or medium-sized enterprise and are seeking a business loan, then one of the most important factors influencing your decision will be the interest rate. The interest rate not only affects the total cost of borrowing but also has a big impact on your repayment structure, cash flow and any longer-term financial planning.

It is also important to remember that no two loan deals are the same and that lenders assess a range of criteria before making an offer. With this in mind, let’s take a closer look at the various factors that may impact the interest rate of any loan offer you might receive. We’ll also look at what factors improve your chances of securing a favourable deal.

Credit Score And Credit History

Your business credit score, and sometimes your personal credit score, can play a major role in determining your loan interest rate. Lenders often use these scores to determine how reliable you have been in the past and how likely you are to meet repayment obligations moving forward. A higher credit score indicates a lower level of risk and usually means you qualify for a lower interest rate. Of course, the reverse is also true, and lower scores generally mean higher rates on your repayments.

Financial Health Of The Business

Lenders will assess your overall financial health to assess whether your business can manage your repayments. This will usually include reviewing your profit margins, cash flow statements, debt-to-income ratio and annual revenue. If your business has a strong and consistent performance and profitability over time, then it is seen as more stable and more likely to receive a competitive rate. However, once again, the converse is true, and if your business has a slightly erratic performance over time, then this will be reflected in your rate.

Loan Amount And Length

Perhaps not surprisingly, the amount you borrow also affects your interest rates. Larger loan amounts tend to qualify for better rates than smaller loan sums, especially if they are secured by assets. Shorter term loans tend to have higher interest rates than longer term loans, although the total interest amount paid will be smaller.

Type Of Loan

Another major factor is the type of loan you are applying for. Secured loans backed by assets have much better rates than some shorter-term loans. Similarly, invoice financing and equipment loans have better rates than merchant cash advances or working capital loans. Choosing the right type of loan is essential for getting the most suitable deal.

Market Conditions

This factor may be out of your hands, but the overall market condition and financial health of the economy also play a role. If circumstances are difficult, then getting a loan at a more favourable rate might be trickier than when the going is good. Inflation and interest-based rates are set by the Bank of England and have an impact on the interest rates across the wider financial sphere.

Understanding the factors that affect your loan repayment rates will put you in a stronger position when it is time to choose a lender and make an application. To find out more, get in touch with a member of our team here at Century Business Finance or check your eligibility for tailored financial solutions by filling out our quick and easy form today by clicking here.

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