Small business loans are a great option for entrepreneurs who need to get their businesses off the ground. These types of loans can provide funding to startups that don’t have much financial history, unlike traditional bank loans. The three most common forms of small business loans are unsecured business loans, installment loans and lines of credit.
An unsecured business loan is a monetary loan paid out to a business owner or a consumer. Unsecured business loans are different from traditional bank loans because collateral is not needed to receive financing. Instead, funders will look into your customers and your sales volume to determine if you qualify and the amount you’re eligible to receive. Therefore, the more sales you generate, the more money you can borrow. Small business loans provide opportunities for business owners to grow their companies by allowing them to borrow up to 90 percent of their gross monthly income to increase their working capital.
If you receive an installment loan, you will borrow a set amount of money and make payments on that amount until you have paid it back in full, plus interest and fees. If you receive a line of credit, it works more like a credit card. The lender will determine a maximum amount that you can borrow and you have access to this money at any time, as long as you don’t exceed the pre-determined amount. You will likely have a monthly payment due to whomever lent you this line of credit. The payment will include the amount due plus any interest and fees owed to the lender.
How Much do Small Business Loans Cost?
Interest rates for small business loans are slightly higher than traditional loans because of the added risk the lender is taking. Companies can offset their risk by applying for a longer-term loan. Depending on each business owner’s situation, it’s likely you’ll be able to choose between a fixed or variable interest rate. A fixed interest rate means you are locked in and will pay that interest until the loan is paid off. A variable interest rate is flexible with the market value. Variable interest rates can make budgeting more difficult because sometimes you’re paying more and sometimes you’re paying less. Variable interest rates can save you money but are also riskier due to the fact that they could rise at any moment.
Having a detailed business plan can help you qualify for a lower interest rate. A solid business plan shows lenders you are prepared and will handle anything that may occur during the startup phase of your business, including financial problems. Some other factors that can influence your interest rate that you may not be able to control include your credit history, your businesses industry and the amount of time you have been in business. Small business loans are a good option for owners who don’t have a decent credit score, haven’t been in business for long and those who may be in a risky industry. Some industries are considered riskier than others, which can increase your interest rate. It’s not impossible to find a loan when you are in the beginning stages of opening your business, but your APR may be higher.
It’s hard to determine the average interest rate for small business loans because they’re highly dependent on the business owner’s credit score, business history, industry and how much they are borrowing. Once these factors are taken into account, annual percentage rates can range anywhere from 5.99% to 35%.
Typically, small business loans are also associated with a few types of fees.
- Borrower origination fee: This processing fee is charged upfront and can be a flat fee or a percentage of the loan amount.
- Underwriting fees: Fees that are collected by underwriters who review and verify all of the information you submit for the loan such as your financial statements, personal bank statements, credit reports and tax returns. The underwriting process also helps determine your interest rate.
- Wire transfer fee: This flat fee is charged to the borrower if they have selected to receive their money via wire transfers. This fee usually ranges from $10 to $20.
- Check fee: If a borrower makes a loan payment with a check there could be a fee associated. It’s usually a flat fee and around $10-$20.
- Unsuccessful payment fee: If you have autopayment and there are insufficient funds in your account when the payment is made, you may be charged a fee. These are usually flat fees and range from $15 to $35 per unsuccessful payment.
- Closing costs: Any other costs that are charged by a funder to process or service the loan such as a loan-packing fee, a commercial real estate appraisal or a business valuation.
Although costly, small business loans are a great option for startups and new business owners. They provide many benefits that include, reducing debt, unlimited funding potential, and pose a reduced risk to the business owner. Small business loans offer a growth opportunity for startup companies in many different industries.