Short-term Business Loans- Interest Rates and a Guide

Are you looking for short-term business loans at low-interest rates? Do you think cheap loan deals are the best to consider? This should not be the right approach to finding an ideal loan offer.

Instead of simply focusing on inexpensive loan deals, pay attention to how interest rates work. Diverse factors influence the formulation of these rates. It can differ based on the funding type or repayment pattern you choose. 

Moreover, it depends on the competitiveness of the loan proposal compared to the remaining market. If you simply look at the rates, you cannot figure out the deeper details. A thorough study is mandatory to understand what should be the definition of perfect rates for you.

Attend to these series of questions that have been compiled here for your understanding.

What exactly are interest rates?

This term is not unfamiliar to you. However, it could have a different meaning and working structure in different cases. Interest rates form an integral part of determining the borrowing cost and might vary from 5% to 10%.

The amount you pay back, in addition to the principal amount, defines the rate of interest. There are components which are not included in the interest. They could be arrangement fees, set-up fees, late payment charges, pre-payment fees (for some lenders), etc.

Which factors can affect short-term business loan interest rates?

The aspects that can influence rates of interest are.

• Credit rating: Individual and business credit scores are vital elements to affect interest rates.
• Trading history: The total duration you have been trading as a business.
• Turnover: The volume of the turnover of your business is another determining factor.
• Debts you have: The combination of debts you are holding should be clear to the lender.
• Borrowing extent: The amount of money you want to borrow after validating the ongoing necessities.
• The urgency of your need: If you want to have speedy money for your business, a different interest rate might be charged.
• Duration to repay: The tenure you will need to pay back the loan debts. 
• Collateral factor: Loans backed by security will have low-interest rates as compared to unsecured business loans in the UK.

If you want to reduce the monthly payments, you can choose a longer duration. The cost will be portioned out over months, thereby letting you pay a small amount every month. This way, borrowing a substantial amount of loan can be affordable for you. 

In general, you have to pay higher interest if you borrow for a longer duration. The right funding solutions should be a balanced combination of affordable rates and repayments at the same time. The lender is going to perform a few checks to make sure that your business is creditworthy. 

How do interest rates work for a short-term business loan?

As you know, the rate of interest is always expressed as a percentage (%). It is calculated from the principal amount you take out over a year. When you see the interest rates the lender charges, it is the additional amount you will pay on the borrowed amount.

For example,

If you have taken a loan amount £ 2000 at a 10% interest rate, it implies the per year interest. When you convert it into numbers, the interest you have to cover is £ 200. Therefore, the final amount that you must repay is £ 2200.

Who decides the rates?

Do lenders have the ultimate right to fix the interest rates? No, the ultimate authority is with the Bank of England. They decide the base rate as the bank rate.

It is applicable to bigger commercial borrowers. They further lend the money by charging a higher rate than the bank. It helps them make a profit out of the lending deals.

Now, the reason why these loan providers charge a different rate. This depends on how they assess the risk factor and, most importantly, how they perceive the ongoing risk. 

Why a longer duration might cost you more?

The interest starts compounding depending on the tenure and repayment pattern you choose. The reason why you see a huge jump in the loan amount you have over the years. This is because interest starts compounding based on the present outstanding amount.

For example,

You take a loan of £ 1000 at a 5% interest rate.

First year

Interest you have to pay= £ 50 (5% of £ 1000)

Total payment= £ 1050

Second year

Interest you have to pay= £ 52.5 (5% of £1050)

Total payment= £ 1102.5

This example must have been able to help you understand how the interest gets added to the outstanding amount. 

What are the different interest rates you have to deal with?

You must have come across other terms like APR and fixed and variable rates. These are nothing but different forms of interest rates. Get an overview of how they apply when you take a loan for your business.

• APR, i.e. Annual Percentage Rate

It concerns the interest rate that accompanies the loan amount. Besides, it accounts for other charges that the lender might be interest to impose. Oftentimes, the borrower gets confused between APR and variable rates.

These rates are not something you get, as mentioned in any advertisement. This is the total cost of borrowing calculated over 12 months. In most cases, short-term loans offered to businesses exclude these rates.

• AER or Annual Equivalent Rate

This interest rate you have covered and you have got compounded every year. One of the biggest different between APR and AER is that the latter does not include surplus fees. You can calculate easily if your loan consists of these rates.

• Flat rate

Unlike APR and AER, this rate is estimated based on the borrowed amount. It has nothing to do with the current outstanding amount. Till the final payment, the loan rate will continue to be extracted from the original principal amount.

The bottom line

How can improve your chances of getting better rates? You must try to downsize the level of debt your business has. Besides, you can either think of providing a guarantor or collateral to get better rates of interest. For more such informative articles, visit here.