Interest Rates For Business Loans
What Are Interest Rates & How Do They Affect Businesses?
Interest rates aren't static; they can rise and fall depending on many factors and impact how much we pay back on large loan repayments such as mortgages.
In 2021, in conjunction with the global pandemic and lockdown in the UK, interest rates hit a historic low. Since then, they have risen slowly but still sit at a much worse position than pre-pandemic levels.
So what does all this mean exactly, and what are the effects on business?
What are interest rates?
Interest is a percentage charge attached to the most common forms of finance.
For example, when securing credit or borrowing large sums of money from a lender, you will be required to pay back the money with interest. This means that the amount of money you pay back to the lender will end up being more than the amount you initially borrowed. If the interest rate is 10%, you would be paying £10 in interest for every £100 borrowed.
The higher the rate, the higher the cost is for borrowing from a lender.
Typically, with short-term business loans, the interest rate will be a fixed amount, meaning it will remain the same until the amount is paid off. But this is not always the case; larger loans, which allow you to borrow more or for extended periods, can vary.
The interest rate of loans is often a reaction to the country's base rate. The bank of England base rate currently sits at 0.25%, which is unusually low, despite haven risen from the historic low that hit in 2021.
This base rate defines the amount it costs for banks and lenders to borrow the money they then lend out to you. This is one reason why it's vital you fully understand any form of loan you take, be it a business loan or a personal loan.
For advice, guidance or assistance with a range of financial services, get in touch with us today!
Through The Lending Channel's strong relationships with lenders across the country, we can find the financing most suited to your business and your current circumstances.
What factors affect a business loan interest rate?
A whole range of factors can impact the interest rate of your business loan. Of course, the current economic situation of the country you live in will impact the rate of competition in your sector.
However, the most significant factors can be split into two main groups;
Factors related to the business itself
Factors related to the business owner, the lender and the type of loan you borrow.
Factors Related to the Business that impact your business loan interest rates
Business loan interest rates can be impacted by three main factors related to the business borrowing from a lender. These are;
Type of business
Why your type of business is important for your loan rates
The type of business you run can significantly impact the eligibility of your borrowing.
Banks and lenders tend to consider certain types of business as more secure than others. For example, an internet start-up business would be viewed as a more risky investment than an established fast-food chain. Therefore, the internet start-up would be forced to pay higher business loan interest rates, as they are seen as less reliable and a bigger overall risk to the lender.
Impact of Capacity
Capacity refers to how much money a business can reasonably borrow, which is determined by how much the business can pay back to the lender and how quickly the loan can be paid back.
This is calculated by analysing the businesses outgoings and the amount of profit they make each month. The lender will also consider the usual monthly revenue of the business, how long the business has been operating, the business's capital and how long the business has been turning over a profit.
Many lenders will request accounting evidence of two or three profitable years, depending on the type of loan you are going for. The better your financial state, the more leeway you will have when agreeing on the loan term for your business loan. A business in better financial circumstances is likely to secure a loan with lower interest rates.
The importance of Collateral
Pretty much every business loan will need some sort of collateral.
Collateral can be a wide range of things, such as; real estate, company inventory, company-owned machinery or even company vehicles. In general, the more collateral that you can offer, the cheaper interest rates you will receive.
Remember, however, that a discount rate will be applied to the value of these assets to calculate the base of your borrowing.
How the business owner impacts the interest rate of a business loan
As mentioned before, the business owner can positively or negatively impact the interest rate of a business loan.
Suppose the business owner has a poor credit rating or fails their credit check. In that case, this could significantly impact the percentage of interest rate you are expected to pay for your business loan.
On the other hand, a business owner with a favourable credit rating will find it far easier to get a business loan with a lower interest rate.
Although the business owner's credit score will not be the determining factor on the final loan agreement, having a satisfactory credit assessment could help your application when dealing with business loan providers.
Types of Business Loans
Business loans in the UK work much the same as personal loans. The lender provides the borrower (the business) with a lump sum to help the business grow and expand. You are then expected to repay this loan over a pre-agreed time period with a pre-agreed rate of interest attached to the loan. The type of loan that you take out will impact the amount of interest you pay each month and whether or not the interest will fluctuate over the agreed re-payment
The type of business loan you request will also impact your business loan rates.
In general, the larger the size of loan, the cheaper the interest rate, as this gives businesses more time to make the necessary repayments.
Secured business loans will also provide cheaper rates compared to unsecured business loans.
It's important to take the time to consider what type and size of loan you need for your business. Even a standard business loan can vary in interest and size depending on the lender you choose. It's always best to shop around before committing to any type of loan to ensure you get the best possible deal.
What is an unsecured business loan?
An unsecured business loan is a loan taken out without any collateral behind it. This means that the interest rates of your business loan will depend solely on the business owner's personal credit score and the business's creditworthiness.
Often, unsecured loans will incur higher interest charges, and it will be harder to obtain a loan agreement from banks and other lenders.
What is a secured business loan?
A secured business loan is a business loan secured by collateral, meaning business assets such as property, stock, or business machinery back up the loan and give lenders more assurance. However, be aware that these assets will be at risk if you fail to keep up loan repayments on your secured loan.
Although a secured loan may sound daunting, it is still the preferred option for most businesses as an unsecured loan gives the bank reason to doubt your reliability and, ultimately, your credibility.
A secured loan will also provide you with lower monthly payments and allow you to borrow a higher loan amount.
If you would like to know more about secured and unsecured loans give us a call or drop us a line. We'd be delighted to provide you with further information.
What is a fixed-rate loan?
A fixed-rate loan is a loan that will not fluctuate over the set loan period.
It has a fixed interest rate for the whole term, meaning you can have a clear idea of the monthly repayments that will need to be made, allowing the business owner to plan their finances accordingly.
Furthermore, fixed-rate loans are less dependent on the ever-changing market conditions. This gives businesses confidence that they will be able to meet the financial obligations they have agreed to.
How can I get a start-up loan for my business?
Start-up business loans can be a great way to get your small business up and running.
The government offers many different types of start-up loans for entrepreneurs who may have a great idea behind them but no financial backing.
The key to being accepted for a start-up business loan is drawing up a detailed business plan that you can clearly communicate to the lender. This will help build trust and show the lender that their payment will be returned in the future.
Due to the nature of start-up businesses, start-up business loans will come with a fixed rate of interest, low costs and are usually unsecured, making it easier for the business owner to secure the loan. Bear in mind, however, these loans are generally expected to be repaid within five years unless otherwise stipulated.
What is the impact of interest rates changes on businesses?
Even if your business currently has no loans to repay, a change in interest rates can still have an impact.
From a customer perspective, those with debts will be paying more interest to banks and lenders, which could cause them to have less income and therefore cause your business's sales to decrease. This is particularly the case for companies that make or sell luxury goods, or what can be classed as non-essentials, as these are the types of things customers may cut back on in times when they wish to save.
The opposite can also be true; if interest rates fall and customers find themselves with more disposable income, you may see a general increase in sales.
The impact of interest rates on property
For a business with a mortgage with a variable rate, the change in the base rate set by the Bank impacts how much you are paying back. If the base rate rises, it is more than likely the interest rate on your mortgage will soon follow and also increase.
Changes to interest and the impact on the value of the pound
Another effect of rising interest rates is confidence in our currency rising, which means whether or not the pound's value will increase.
This can be great news if your business deals with importing goods, as you will see lower prices. However, for exporting goods, a drop in demand may be a consequence of your goods becoming more expensive to customers in other countries.
Brexit is having a knock-on effect on the value of the pound, which can result in unsteady interest rates. Previous to events such as Brexit & COVID-19, it was far easier to predict the annual interest rate for business loans. It was also easier to secure larger business loans, as the economic landscape was clearer and healthier.
Now more than ever, it is essential to consult with a financial expert when looking to take out a business loan.
The Lending Channel can help you secure a range of financial solutions and help you navigate the ever-changing landscape of interest rates, mortgages and short-term loans.
Get in touch with us today to see how we can help move your business forward and secure the business funding that you need.