Typical Interest Rates for Business Loans
The exact terms of a business loan are negotiated between the lender and the borrower. However, in general, most business loans have a maximum capacity of $5 million. With this type of money, the interest rates must be taken into consideration. Let’s take a look at the typical interest rates for business loans and how it is determined.
Interest Loans on Business Loans
The interest rates for a business loan are negotiated between the lender and the applicant. There are both variable and fixed interest rate structures available. The most your interest rate will be is composed of the allowable spread and the base rate. Three base rates are used to determine this–the prime rate, which is always published in national daily newspapers, the SBA Peg Rate, and the London Interbank Prime with an additional 3 percent added to it. Lenders can then proceed to add on a spread on top of the base rate to create their final interest rate.
Interest Rate Amounts for Business Loans
For those business loans that have a maturity of less than seven years, you’ll find the spread to be no higher than 2.25 percent. On the other hand, for loans that have a term of longer than seven years, the largest the spread can be is 2.75 percent. However, for loans that are less than $50,000 and for those that are given out with rapid underwriting procedures, interest rates are usually higher.
Variable Versus Fixed Interest Rates
As stated earlier, business loans either have a variable or fixed interest rate. With a loan that has a fixed rate, the interest rate will remain the same for the length of its term. Conversely, with a variable rate loan, the interest rate may shift at certain intervals, such as monthly or quarterly. If you take out a variable small business loan, then the rate will move based on one of the base interest rate numbers with the additional fixed percentage. Typically, if you want a smaller business loan, you will only be able to take one out that has a variable interest rate.
What Determines Business Loan Interest Rates?
It is the Small Business Administration (SBA) that determines the maximum interest rates that lenders can charge for a loan. Currently, the maximum is set at between 5.75 percent and 8.25 percent depending on the amount taken out. The highest interest rate amount is also based on the market interest rate. Government policies and inflation determine this rate. Additionally, supply and demand affect interest rates, which means the more demand there is for credit, the higher interest rates will be.
Interest Rates Aren’t the Only Cost
When you take out a loan, you must typically pay an origination fee. This covers the cost of the lender who is providing the loan, including their marketing costs. Usually, this origination fee is removed from the top of the loan, which means that if you borrow $50,000, a 4 percent origination fee will make it so you would receive $48,000 instead.
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