What Affects Interest Rates for Business Loans?

You can’t choose the right business loan for your venture without considering the interest rate. When lending money, banks and other financial institutions will typically charge interest. The annual percentage rate (APR) represents the cost of this interest per year. Some business loans have an APR of 10%, whereas others have an APR of 20% or more. What affects interest rates for business loans exactly?

What Affects Interest Rates for Business Loans?

Federal Funds Rate

The federal funds rate will affect interest rates for business loans. Set by the Federal Open Market Committee (FOMC), it’s the universal interest rate at which banks in the United States can lend money to each other.

With a low federal funds rate, the cost of borrowing money is cheaper for banks. They’ll pass these savings down in the form of lower interest rates for business loans. A high federal funds rate, on the other hand, will result in a higher cost of borrowing money for banks and, thus, higher interest rates for the business loans that they offer.

Credit History

When applying for a business loan, the lender may check your credit history to determine an interest rate. Many lenders consider credit history when determining interest rates. If you have bad credit, you may still be able to obtain a business loan. The business loan, however, may come with a higher interest.

Keep in mind that lenders may look at both your personal credit history as well as your business’s credit history. You don’t need stellar credit to obtain a business loan with a low interest rate. Nonetheless, you should check both your personal credit history and your business’s credit history to ensure it doesn’t have any major red flags.

Secured vs Unsecured

Interest rates can vary depending on the type of business loan. Lenders typically charge higher interest rates for unsecured loans than secured loans. If you’re worried about overpaying on interest fees, you may want to choose a secured loan.

There are secured business loans and unsecured business loans. Secured means that a given business loan required collateral. You’ll have to provide the lender with a guarantee that’s backed by some of your personal assets. These assets are collateral. Unsecured business loans don’t require the use of collateral.

Not all business loans have the same interest rate. Interest rates can vary depending on many different factors, some of which include the federal funds rate, your credit history and whether it’s a secured or unsecured business loan.

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