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Business Loan Interest Rates

An annual percentage rate (APR) is how traditional loans are calculated. However with merchant cash advance and other types of small business loans a “factor rate” is often used.

What is a factor rate?

A factor rate is often displayed in decimal points as it is not an APR. A factor rate of 1.30 would mean on a $10,000 loan, the interest repayable would be $3,000 over the 12 month term. 30% is the true cost of the interest.

Unlike an APR where the interest is calculated on the principal remaining, meaning as payments are made the principal and therefore interest being paid is lower. With factor rate loans the interest is calculated on the original loan amount (plus any fees).

10 Ways To Lower The Cost of Your Business Loan


Build a business case

There are lots of reasons why you might be considering a business loan. You may want to even out fluctuations in your working capital, scale up your operations, or seize an exciting opportunity for expansion. But finance comes at a cost, so you need to know that the returns will outweigh the expenses.

Put together a detailed business case to show how funding will benefit your business and establish how much you can afford to pay for finance before it stops being viable.


Get professional advice

Cutting the cost of business finance means much more than picking the lowest interest rate. There are lots of factors that impact the overall cost, including the way you structure your loan.

The best way to save money is to talk to an expert who can help you make sense of all the options, establish a tax-efficient structure and make informed decisions.


Match the finance term to the need

Before you start looking at specific options, make sure you’re following the most fundamental principle of business finance: match the term of the finance with the term of the need.

Long-term finance like a mortgage may offer lower interest rates, but getting locked in to borrowings you no longer need can cost you dearly. Meanwhile, at-call finance like an overdraft facility can cost more – but you’ll only pay interest when you’re using it, and it’ll give you flexible access to cash when you need it.


Choose the right type of finance

There are 17 different types of business finance on offer, each suited to a specific purpose or business model.

Lenders that specialise in the type of business you’re offering may provide more competitive rates, so it’s important to choose the type of finance that best matches your needs.


Calculate ALL the costs

When you’re calculating the cost of finance, make sure you’ve captured ALL the expenses involved. Depending on the type of loan you can expect to pay set-up and discharge fees and ongoing admin fees – but there may be a host of other (sometimes hidden) charges. Even a small variation in rates and charges can have a substantial impact, especially on long-term finance.

Make sure you know exactly what you’ll be paying, and don’t ignore the value of your time when you’re weighing up your options – if you’re planning to approach a bank it can take hours just to fill out the forms, not to mention preparing all your supporting documents.


Leverage your collateral

Regardless of the lender, interest rates are all about risk. If you have property or assets you can offer as security, consider using them – you can expect to pay far less if you can provide collateral than you would for an unsecured loan.


Pay attention to timing

Getting a loan can take time, particularly if you’re applying to a big bank (they can take weeks or even months to assess applications). Meanwhile, you could be missing out on valuable opportunities, or paying hefty credit-card rates to cover a cash flow shortfall.

Factor in the cost of waiting for funding when evaluating your options – quick funds at a higher rate may actually work out cheaper.


Choose the right lender

The big question is bank, or non-bank? Banks tend to offer the most competitive interest rates, but they also have the most rigorous criteria – e.g. several years’ successful trading, minimum levels of turnover and some form of collateral. ‘Fintech’ alternative lenders tend to be faster and more flexible, but generally charge more.

Before you apply, make sure you meet the lender’s requirements – and that they meet yours. Preparation time, processing speed, approval rates, the lender's’ reputation and the overall cost of the loan should all be factored into your decision.


Read the fine print

This is particularly important with alternative lenders, who are not subject to the same regulation as the big banks. They can attach all sorts of conditions to your loan that protect their interests but not yours. Be sure you know exactly what you’re signing up for and that they aren’t imposing costly restrictions on your business.


Be prepared

You need to give the lender good reason to offer you finance. Banks in particular operate on rigid criteria, and may reject an application simply because they don’t understand your business.

Prepare a strong business case plus all the supporting documents the lender needs, to avoid expensive delays or even the risk of having your application rejected (and getting a deadly black mark on your credit rating).