What You Need to Know About Small Business Loan Terms

There are certain factors that affect small business loan terms which include risk and return. The bank or working capital lender will want to make money on the deal and lose as little as possible. Their return on your loan depends on you repaying the loan on-time, in addition to potential interest and fees.

If the bank or alternative lender isn’t sure that you will pay back your loan responsibly, they might charge more in interest and fees. They need to justify making the risk somehow if you are seen as a risky borrower.

5 Factors That Can Affect Business Loan Terms

Business and Personal Credit Scores

A poor credit score will mean that your interest rates and fees on business loan will increase as opposed to having a good credit score. Your personal credit score has an impact on your loan terms too, not just your business credit score. Lenders will look at both.

Your Business Plan

For business owners without stellar credit, loan terms will not rely on your credit history, especially if you apply for a loan through an alternative lender instead of a bank. Lenders will feel more comfortable if you are worth the risk for them so submit a professional and comprehensive business plan.

Although it won’t drive your loan costs down by itself, a professional business plan helps lenders understand the business they’re investing in. This will help them understand your business more so you look like a more favorable applicant.

Business History

The failure rate of new businesses has been well-documented, and business lenders are aware of this. Many banks prefer that businesses have at least three years in business. Sometimes an alternative lender is a better option in this case because their rules are less stringent. They usually only require the business to have a few months of operation.

If you’re a new business owner, you can expect skepticism from potential lenders, especially if they are banks. If you receive a bank loan, you’re likely to pay a higher interest rate or have a shorter payback period than a similar business with a longer track record.

The Size of Your Down Payment

A large down payment or personal equity in your business shows lenders that you can be counted on to repay the loan. If you cannot afford to put up collateral, a bank can charge you interest and fees, or make your repayment period short.

Type of Business

Certain businesses are riskier than others. Even with down payment and great credit, you can face high interest rates than a business that is in a more lucrative industry.

The Bottom Line

Business loan terms depend on various factors, that are both in and out of your control. It is hard to get a conventional business loan with a low interest rate without a long and successful track record. You need to stay diligent because if you can improve certain areas of your business that are mentioned in this post, you may be able to receive a loan with favorable terms.