Understanding Small Business Loan Rates

Small business loan rates are based on the same application factors as personal loan rates. These factors include: credit score, total debt, income, and potential future stability. Initially, a small business loan will be distributed in the name of a business owner, and the owner's personal information will be required. Once a business has been operating for some time, a business owner can begin to rely more on the business's own credit to determine loan rates.

Credit Score

A business owner's credit score will be used on an initial funding application. The score should be above 700 to fit into the "low risk" zone. A score of 650 to 700 may be acceptable, but higher rates will be charged on the loan. A score under 650 will likely mean the business owner has to seek a specific high risk loan. In this case, the highest possible small business loan rates will be assessed. Once a business has been in operation for a number of years, it will generate its own credit associated with a tax payer ID. As a business pays its bills, it becomes a whole entity, allowing the business to stand alone on a future loan application.

Total Debt

The debt of a person is considered on a personal loan application; the debt of a business is considered on a business loan application. Debts can include rent of a facility, the cost of operating the business and debts to vendors. For a new business, personal debts of the business owner will be considered. The higher a person's debt compared to his or her income, the lower the limits on the loan and the higher the interest rate. High monthly payments or a high down payment may also be required to overcome the threat of default.

Income and Assets

The income of a business is essential in assuring the lender a loan will not go into default. If a business has not been in operation, then income will be estimated in a business plan, detailed in the next section. If a business has been in operation, then previous financial records will be used to determine its fiscal strength. Any assets, including machinery, electronics and equipment can be used to enhance a financial profile and reduce loan rates. For a sole business owner applying for a new loan, personal assets like a home or vehicle can be used on an application. It is better to not use personal assets for collateral on a business loan, however.

Potential Future Stability

One area where business loan rates differ from personal loan rates is how future stability is determined on the application. For an individual, this is determined by income. For a business, this is partially reliant on a business plan. A business plan shows when and how profits are anticipated according to specific projections. Even a new business will have a business plan. The better the plan, the lower the loan rates initially quoted. Weak plans require more risk on behalf of the lender, so higher loan rates will be assessed.

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