Typical Small Business Loan Rates and Terms - Growth Freaks

Typical Small Business Loan Rates and Terms

small business loan rates

Most business owners borrow part of the money they need to open their businesses. They either take loans out from banks, get special loans from organizations like the Small Business Administration (SBA), or borrow from friends or family. When seeking a loan, you need to research small business loan rates to find the one that best suits yours.

Types of Small Business Loans

When borrowing money to start a business, there are several types of loans for which you can apply. The types of loans offered will depend on the lender as traditional bank loans will be different than loans from organizations like the SBA.

Traditional Bank Loans

Many of the loans that you can get from a bank will also be available from credit unions or alternative lenders who offer loans to those with past credit problems. The loans in this category include:

  • Professional Practice Loans
  • Working Capital Loans
  • Lines of Credit
  • Franchise Setup Loans
  • Equipment Loans
  • Merchant Cash Advance

Professional Practice Loans

A person who offers professional services, such as a lawyer, doctor, veterinarian, engineer, or accountant, can use a professional practice loan to for their practice. They can borrow money to finance the purchase of a practice, renovate their offices, purchase equipment, or refinance or consolidate debts.

Working Capital Loans

A working capital loan is one that a business owner can use to keep their doors open. It allows a business to get the capital they need for daily operations until the business it generates more revenue. The repayment terms are short and interest rates are usually higher than that of other business loans.

Lines of Credit

A line of credit can be used for a business’ daily operational needs. The terms vary on this type of credit because they can be short-term, for as little as 90 days, or a line of credit can be available for several years.

Although the interest rates can be higher than a regular business loan, the main advantage to a line of credit is that you don’t pay interest or fees on the entire loan amount, only what is used. If you make the repayments on time, this type of credit can help increase or maintain your credit rating.

Franchise Setup Loans

If you’re buying a business franchise, this loan can be used to pay the franchise fees, purchase equipment or purchase real estate for the business location.

Equipment Loans

If you need any equipment for your business, you can take out an equipment loan. Whether you need new office or IT equipment, trucks, construction equipment, or a fleet of cars, it can be covered with this type of loan from a bank, alternative lender, or the SBA. An equipment loan is usually easier to get than other types of loans because of the equipment doubles as the loan’s collateral.

Merchant Cash Advance

The amount a business owner can borrow with this type of loan is based on the company’s credit card receipts. The business may be able to borrow up to 125% of their monthly credit card volume. The repayment terms vary by lender, with some taking out fixed amounts of repayments from the daily credit card receipts to a percentage of the company’s daily credit card sales.

Small Business Administration Loans

The SBA is a good place to get information about opening and running small businesses. They also offer grants and loans to people opening small businesses. The main advantage of borrowing money from the SBA is that their small business loan rates are can be lower than current market rates. Here are some of the loans they offer.

7 (a) Loan Program

The SBA’s 7(a) loans are available to small businesses for almost anything they need. The money can be used:

  • Daily operational expenses.
  • Buying equipment, machinery, furniture, or fixtures.
  • To purchase land, buildings, new construction or renovations.
  • Business expansion or acquisitions.
  • Debt refinancing.

These loans are available through participating lenders. Borrowers can take out as much as $5 million, and the loan terms are 10 years for working capital loans and 25 years for other needs.

Microloan Program

A microloan is a small loan available for new or existing businesses who are trying to expand. While they can be used for most business needs, microloans cannot be used to pay off debts or buy real estate. Loans are available for as much as $50,000, but the average amount is only $13,000. The repayment term is for six years on these loans, which are available through intermediary lenders.

Real Estate and Equipment Loans

If your small business needs to purchase land to build a new location or needs new equipment, you can apply for a CDC/504 Loan from the SBA. These loans are fixed-rate, long-term loans in which the SBA provides 40% of the main financing for the project, a participating lender puts up 50%, and the small business owner is responsible for 10% of the needed money.

The loans cannot be used for working capital or inventory, and they are available for amounts up to $5.5 million. The loans have 10 or 20-year repayment terms.

Disaster Loans

If your business is affected by a declared disaster, such as flooding, tornadoes, hurricanes, fires, or other natural disasters, you can apply for an SBA disaster loan to cover the costs of repairing or replacing inventory, real estate, machinery, equipment, and business assets. Disaster loans can provide up to $2 million to get businesses back on their feet.

Important Loan Terms

When looking for a loan, you should know these loan terms to make good decisions for your business.

Maturity

The maturity date of a loan is when the final payment is due. The final payment is the principal amount that is left, plus any remaining interest on the loan.

Fixed Interest Rate

When you take out a loan, it will either have a fixed or variable interest rate. A fixed rate is one that stays the same for the life of the loan.

Variable Interest Rate

Also, know as a floating interest rate, it is one that can change will fluctuations in the market. When loan rates go up, then the loan’s interest rate can go up. If the rates drop, then your loan interest rate may go down.

Balloon Payments

Some loans have balloon payments that are due at the end of the loan’s term. The monthly payments you make are usually on the interest or a small amount of the principal plus interest. When the loan matures, you will be responsible for a large loan repayment. Make sure to find out if the loan you are applying for has a balloon payment.

Prepayment Penalties

While most lenders don’t mind if you repay the loan early, some loans will charge penalties for early payoffs. When taking out a loan, determine if you can pay off the loan early without being penalized.

Charge-Off

A charge-off is an amount that the lender has written off as bad debt. Once a debt is charged-off, the lender no longer expects it to be paid. However, they can sell it to a debt collector who will try to recover the remaining amount of the debt.

Collateral

Any asset that is used to secure a loan. A home is used as a collateral, for example.

Non-Secured Loan

A loan that doesn’t require putting down collateral to guarantee repayment.

Secured Loan

A loan in which collateral is used to obtain the loan.

Interest Terms (Small Business Loan Rates)

Whether you’re opening a credit card account or taking out a business loan worth millions of dollars, it is important to know these interest terms.

Annual Percentage Rate

The APR of a loan is one of the most useful pieces of information for comparing loans. It tells you the total cost of the loan that you’ll be paying. It includes the interest and the fees on a loan.

Simple Interest Rate

A simple interest rate on a loan is one that takes the principal of the loan times the interest rate times the length of the loan. So, if you took out a loan for $30,000 at 9% interest for 10 years, the simple interest would be $30,000 x 9% x 10 = $57,000.

Compound Interest

A compound interest rate is an interest that is paid on the initial loan amount and the interest it has accumulated over time. When you borrow money or open a credit card, it will say whether the interest is compounded annually, semi-annually, quarterly, monthly, or daily. You will pay much more for a loan with a compounded interest rate than one with a simple interest rate.

Amortization

This term is used when taking out a loan and repaying the principal and interest through monthly installment payments until the date of the loan’s maturity.

Final Thoughts

Before you start to research loans for a business, you need to hire an accountant to help you with the financial aspects of operating a business. They can help you determine if you can afford to open a business, write a business plan to secure financing, go over small business loan rates with you, and keep your company’s daily financial records. Not to mention the specific tax deductions that you should be aware of.

Additionally, there are 3 Small Business Grants for Women to Check Out. These grants are specifically for women looking to start a business. They recognize that women still have a harder time getting financial support than men. 

Significantly, owning a small business doesn’t come without risks thus it is also important to choose a general liability insurance.

Author: Jon Stahl

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