Low interest business loans
How to compare low interest business loans to make sure you get the best deal.
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Interest rates are a major contributing factor to the cost of a business loan, which is one of the reasons low interest business loans are so tempting. This guide will take you through everything you need to know about low interest business loans, including all the factors you need to look at to see if they really are a good deal and how to decide if they are right for your business.
Why do these business loans have "low interest"?
There are three primary reasons why a business loan may be considered "low interest".
- While the interest rate is low, the loan also includes other ongoing fees and charges that increase the overall cost of the loan.
- The loan has a long term, with less frequent and longer payments. This will make the repayments more affordable in the short term, but the overall cost of the loan will be higher over the full term of the loan.
- Your business and loan purpose is considered so low risk that the lender is willing to offer an interest rate discount. This is particularly the case if you're able to offer residential property as security for a business loan – lenders may offer an interest rate discount to bring rates closer to home loan mortgage rates than standard business interest rates.
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Is my business eligible for a low interest business loan?
The business loans market is not subject to the same regulations as the home loan market, giving lenders a considerable amount of leeway when it comes to setting the terms of their business loan products. This is why lenders offering business loans rarely advertise their business loan interest rates and tend to consider applications on a case-by-case basis.
With this in mind, it is important to understand that the terms of a business loan offered to one applicant can be very different from those offered to another. Lenders are always looking to mitigate their perceived risk and will not hesitate to charge a higher interest rate to a business they perceive as high risk.
Your business will be more likely to be eligible for a low interest business loan if you can satisfy most of the following criteria:
- A healthy business profile, including a solid trading record and a clean credit history
- High annual turnover and healthy cash flow
- Low-risk or income-producing loan purpose, such as to purchase standard commercial property rather than to pay off a tax debt or to consolidate other loans
- Solid profile of valuable business assets
- Offering security for the loan, particularly residential property
What other costs do I need to consider with a low interest business loan?
While the interest rate charged on a business loan is an important consideration, it can't be the sole determining factor.
Consider all costs associated with a business loan when weighing up your options, including loan establishment fees, monthly service or account-keeping fees and early repayment fees, to compensate the lender for the interest they would have received had you not paid the loan out earlier.
When comparing business loans, it is important to choose a loan that suits your individual needs. While a low interest rate can be enticing, it's probably not a good idea to choose a fixed rate loan with high early repayment penalties if you're planning on paying out the loan early. Similarly, a low interest rate quickly loses its shine when accompanied by high monthly account-keeping fees.
How is interest calculated on a low interest business loan?
Not all business loans are created equal, and not all interest rates are calculated in the same way. When comparing low interest business loans, consider the different ways that interest can be calculated:
- A fixed interest rate is a set rate applied to the repayments over the life of the loan.
- A variable interest rate is a rate that may change – either upwards or downwards – over time, depending on the strength of the economy and the movements of the cash rate set by the Reserve Bank of Australia (RBA).
- An annualised percentage rate (APR) is a standardised percentage rate that includes the interest rate applicable to the loan as well as all ongoing fees and other charges.
- A factor rate is an interest rate expressed as a multiplier rather than a percentage. For example, a factor rate of 1.3 applied to a loan amount of $10,000 will incur $3,000 in interest during the life of the loan, with the total cost of repayments being $13,000 (1.3 x $10,000).
- A discount rate is usually applied with an invoice factoring arrangement and refers to the percentage of the invoice that will be forfeited to the factor in exchange for early payment of the invoice. For example, applying invoice factoring to a $10,000 invoice with a discount rate of 5% will see $500 in fees paid to the factor.
How do I compare low interest business loans?
With so many things to consider, how should you go about comparing low interest business loans? Interest rates aside, what would make one business loan stand out above the rest? Just like any other loan or financial product, there will never be a single low interest business loan that is "better" than the others. The best choice for you will depend on your circumstances and could differ from the ideal business loan for another business.
When you're ready to compare low interest business loans, consider the following:
- Interest rates. Not only is the rate itself important but also consider whether the rate is variable or fixed for the life of the loan.
- Fees. Low interest rates need to be considered in conjunction with the fees charged on the loan. As we now know, a lower interest rate combined with high monthly fees can end up being more expensive than a fee-free loan with a higher interest rate. Be aware of establishment and early exit fees.
- Security. Is the loan secured or unsecured? If you have an asset to offer as collateral for the loan – ideally residential property – you could be eligible for an interest rate discount.
- Loan repayment frequency and loan term. Look for loan repayments that match your cash flow, and a term that suits the purpose of the loan. If you're looking to buy equipment with a three-year useful life, you won't want to be still paying it off in five years' time.
Questions we've been asked about low interest business loans
What documents will I need to apply for a low interest business loan?
You will need to prove to the lender that you can afford the loan. Requirements will vary, but in general you will need your most recent tax and financial statements, including profit and loss and cash flow forecasting, a detailed business plan, as well as personal information about yourself and any other directors or major shareholders.
Will my personal credit history be assessed?
When applying for a business loan, the lender will assess the credit history of the business as well as its directors and major shareholders.
Can I apply for a low doc or no doc loan?
If you're self-employed or operating a small business without a significant trading history, a low doc or no doc loan can give you access to finance without having to supply detailed financial records. While big banks are unlikely to offer a low doc or no doc business loan, smaller or independent lenders are more likely to consider lending to businesses who can't provide financial statements and tax returns.
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