4 Notable Tips To Lower Interest Rates On Business Loans

by Josh Biggs in Finance on 27th May 2020

Although many small businesses find it necessary to borrow money, entrepreneurs are always searching for ways to lower the interest rates on their business loans.  This is very important since depending on the kind of loan, the amount borrowed and the overall health of a company, loan payments can spiral completely out of control very quickly and affect all aspects of a business.

So what can business owners do to lower their interest rates? The following are a couple of tips to help do just that.

1. Pay off your loan faster.

Interest is calculated in two ways by lenders: compound interest and simple interest. With simple interest, lenders require repayment to be made within a certain time frame at a certain amount over the original amount that was borrowed.

If you have a loan of $100,00 with a 20% simple interest rate, then over the lifetime of the loan you will end up repaying $120,00. Compound interest works differently.  It can give your business a boost if you are willing to pay your loan off faster. Compound interest gets calculated at specific set intervals. Interest gets calculated based on the original loan’s remaining balance along with the interest that has previously accrued.

If you pay this type of loan off faster, it will reduce the amount of interest that you pay. If your loan gets compounded daily, weekly, monthly, or yearly, then it is a good idea to pay it back as fast as possible. The higher the principle is, the more you pay in interest.

However, even some loans that have simple interest rates will still benefit from paying them early. Different types of business loans have a specific date where there is an increase in the interest rate when there is a remaining balance. This increase in interest rate could potentially cost thousands. That is why it is important to pay your loan off as soon as you can.


2. Make improvements to your personal credit score.

For any lender, one of the most important and first metrics that they look at is the personal credit score of the business owner. So when you are searching for the lowest interest rate possible, it really pays to make improvements to your personal score if possible.

Your business finances and personal finances should be kept separate. However, your credit score is still a useful indicator of the likelihood that you will repay a debt and your history of doing so in the past.

Max Funding finance experts say, “if you want to try to reduce your interest rate before you get a business loan, improving your personal credit is an important strategy to demonstrate to the lender that you are a qualified borrower. Also, making improvements to your credit score can also help you secure other loans in the future.”

3. In the right situation, refinance your company’s debts.

There are many situations where refinancing the debts of your business can be the best way to lower the interest rate on your business loan. Also,  refinancing can make it easier to run your business.

If you obtained multiple loans with high-interest rates when you first started your business and there has been an improvement in your finances, then refinancing might be a good option to consider. Your outstanding debt could be consolidated into one loan with a lower interest rate that is based on your company’s financial health having improved.

If you got a short term loan with a high-interest rate to start your business, your improved situation could be used to obtain a longer-term loan for covering your original one. In this way, your success will give you more time for paying off the interest. Your original lender will be paid, your interest rate will be lower, and your new lender can be confident that you will repay your loan.

You could even change the type of loan you have. If during refinancing you qualified to get an SBA loan that you did not qualify for originally, then in that situation it might be best for you to apply for the SBA loan.

4. Make a good impression at all times.

Whether you are trying to reduce your interest rate during a refinancing, at the start of a loan, or somewhere in between, most likely you will be speaking to or meeting with a lender representative. Therefore, it is very important to keep the human element in mind. The lender views you as a potential. They need to consider what the chances are that your business will repay the loan.

So anytime you meet with a lender, it is important to be thoroughly prepared. That is also true when it comes to appearance. These meetings should be treated like job interviews.

However, being prepared also means exerting the necessary effort and time into developing a comprehensive business plan. This involves practicing your presentation or speech, anticipating what questions will arise, and ensuring you have the necessary and proper records and documents handy. You also need to be prepared to answer questions regarding them. Make sure to develop a smart business plan and be prepared to explain your company’s future.

These tips all come down to the same concept: prove that you are trustworthy to the lender.

You need to prove to lenders that you will definitely repay your loan.  After you prove that you are not at risk of failure to pay, there will be a much higher chance that they will reduce the interest rate on your business loan – or get you started at a much lower rate to begin with.

Categories: Finance