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Applying for a business loan can do a lot to help your business out of a tight financial spot. Alternative and traditional lenders offer a range of loan products suited to most types of businesses and their financial needs.
There's more to a business loan than just having money deposited into your account and paying it back. Besides possible establishment and monthly fees, lenders will also charge you interest in exchange for providing the loan.
This guide will take you through the different types of interest possible charges when taking out a business loan.
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Interest is expressed as a percentage of the principal loan amount and is the additional money you pay to be able to borrow. For example, if you borrow $12,000 with an interest rate of 5.5% p.a. over a period of one year, you will repay $1,030 per month. This means you will pay $30 per month in interest or $360 interest in total. You will repay the lender a total of $12,360, which includes principal and interest, by the end of the loan period.
The loans terms offered, including the interest you pay, are based on how much of a risk you represent. If your business is new with few valuable assets and a small turnover, you may be paying a higher interest rate than an established business with a bigger profit margin.
Interest rates vary depending on the lender, the lending criteria and the loan type, but in most cases the following factors are taken into account:
Here are some of the terms used to express the different forms of interest charged on various business loan types.
Besides interest, the lender charges various fees for setting up and providing a business loan. The APR includes all of these fees and the interest you'll be charged and is expressed as a percentage, therefore giving you a more realistic idea of what the loan actually costs.
Invoice factoring companies charge this rate, which is a percentage of the invoice amount being financed. For example, if your invoice value is $3,000 and the discount rate percentage is 5%, you pay the lender $150.
Invoice factoring, a part of invoice financing, involves the finance company having the full invoice ledger and collecting all the debts when they're due.
Compare the invoice financing products below.
This is a multiplier applied to the amount loaned on unsecured fixed-term loans. A factor rate is expressed as a figure, such as 1.2 or 1.5. For example, if the loan amount is $10,000 and the factor rate is 1.2, you will repay $12,000 ($10,000 x 1.2).
Repaying a loan before the end of the loan term means you stop paying the lender interest. Some lenders charge a fee to compensate for the interest they would've received had you continued to the end of the loan term.
When you apply for a business loan from a traditional lender, you'll have the option of a fixed or variable interest rate, or a combination of the two, for larger amounts borrowed over longer loan periods.
When calculating the cost of a business loan, it's important to make sure that the loan product is suited to your business profile and objectives. For example, if you plan to repay the loan quickly, choose a lender that won't charge early repayment fees.
The loan should also suit your business's budget. Besides the interest payments, lenders also charge a series of one-off and monthly fees for providing the loan, all of which can take a chunk out of your budget over the loan period. Make sure you take the interest rate into account when comparing your business loan options.
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Is 6.1% high for a small bussiness loan of around $80,000
Hi Stan,
Thank you for visiting finder.
Lenders have two ways of charging an interest rate on your business loan which is either having a Fixed Interest or Factor Rate in which interest is charged on the Principal owing.
Interest Rate can vary from Lender to Lender; you should compare all the fees that are included in the loan to know if it’s right for the cash flow of your business. Interest Rates are being calculated based also on their assessment of your financials. The 6% Interest Rate that you have is lower than the 12.95% of NAB QuickBiz Loan. You may also compare the other Small Business Loans listed on this page.
I hope this helps.
Let us know if there is anything else that we may assist you with.
Cheers,
Ash