How To Reduce Interest Rates on Business Loans
While borrowing, many small business owners and savvy business owners look to reduce the interest rates on the loans. It is because a loan amount and continuously increased payments with a whopping interest can affect every aspect of business operation.
Several factors affect the lending ability of the creditors with business loans in the UK.
- Credit score
- Credit history
- Debt-to-income ratio
- Business profitability
- Net income of the business owner
- Type of business
- Years of experience
- Other existing loans (if any)
Thus, these are some parameters affecting the lending capability with business loans.
An interest rate on loan reflects the bank’s assessment of the risk that you may not pay the money. Banks charge their customers the rate for lending a 5ooo pound loan or more to businesses as compensation for the risk.
Tips to Reduce interest on a business loan
The defined amount must be paid regardless of whether you have a high-interest commercial loan from a bank because of past credit errors or a low-interest loan because of your credit history.
Hence, it is wise to explore ways to reduce the interest on a business loan since paying interest gives no benefit.
Here are some ways to reduce interest on your business loans:
1) Analyze the red flags in your company
Study the factors that banks consider when determining the interest rate on a loan amount before borrowing a business loan.
An interest rate is the lender’s way of protecting itself from the possibility of business default. Once you identify those issues and the lending criteria, try fixing those issues.
2) Boost the company’s stats and profitability
The single most financial factor that a company undertakes while weighing your company’s financial strength is your company’s growth and profit stats.
The bank evaluates a company’s finances or financial statements to analyze how much profit you are currently making or whether your profits are trending higher and lower. The bank analyses how much debt you already owe before lending you a 5000-pound loan or more.
To get a low-interest loan, you must show the profitability of the firm and its growth. You should work to reduce your outstanding debt figures.
3) Improve your personal and business Credit Score
Before lending funds, the bank considers the credit score of the company and individual. Separate business and personal accounts are a good idea.
Now, if you are looking forward to reducing the interest rate on your business loans, then separate accounts can prove helpful. The credit score qualified by important agencies like Equifax and Trans Union depends on your repayment history.
Especially for larger business loans, banks undertake credit scores to analyze the amount of risk a business can take. They analyze whether you have defaulted previously or declared bankrupt in your credit history and whether your company has an excellent record of paying creditors timely or not.
In this sense, attaining and maintaining a good credit score can directly influence the growth of your business. Thus, it is important to understand your credit score and how it will affect the future of your business before applying for one.
4) Refinance your business debts, if suitable
There are many ways where refinancing your business debts is the best option for reducing interest rates on your next business loan. Refinancing may help you run your business smoothly.
If you gained multiple loans in the initial stage of your business and now the situation has improved, then you can consider refinancing the loans. You can merge your debts into a single monthly payment. The best part is consolidation loans reduce interest.
Or, if you begin your business with a short-term loan at a high-interest rate, you could use your improved circumstances to secure a long-term loan and pay off the original loan. Thus, in this way, you pay a 5000-pound loan at a lower interest rate. Thus, you can use refinancing for changing different loan types.
5) Offer something valuable as collateral
If your chances of securing a business loan at a low-interest rate are grim, then you can set up valuable collateral. It is another way to reduce your interest rate.
For example, you own a building costing millions and set it up as collateral. Then it can make the loan cheaper and improve your creditworthiness in the eyes of the lender.
According to a fact, “If a business owns tangible assets of high value as collateral, it can significantly reduce the interest rates and make the loan cheaper.”
You can lower business loan interest this way and meet the requirements of your existing business.
6) Do your research
Before settling for a lender, you need to do homework and extra legwork. There are different ways to borrow money for your business. And some loans may or may not qualify for and the loans that pay back in between. And the best way to ensure you have borrowed at a lower interest rate is by comparing the lenders and concluding that you have borrowed from the best lender.
7) Pay your loans quickly
The lenders compute interest rates in two ways- simple and compound interest rates.
In a simple interest rate, a lender will require repayment at a higher rate than the amount owned after a certain amount of time.
In opposed to simple interest rate loans, compound interest loans are more beneficial for a business. It is calculated at certain set intervals, and the interest is calculated based on the remaining balance of the original loan and additional interest accrued on the loans.
If the business owners pay the loans quickly, the interest will reduce drastically. If a loan is compounded monthly or weekly, it is ideal to pay the 5000-pound loan or more before.
Thus, all these ideas signal a single thing- trustworthiness. Prove your lender that you will pay the business loan quickly, missing no payments. Once you prove it, they are likely to reduce the interest rates on a business loan.