How Business Loan Rates Are Determined By Williams Acosta At Isnare.com Ezine Articles

Business loan rates vary wildly from one investor to the next; but why? When an investor requests a business loan, the bank or lending institution extends a loan with a certain pre-determined interest rate attached. This rate is called a prime rate that is usually defined by the Federal Reserve. However, often this basic rate is not what the bank or lending institution charges for business loans. The rate that is quoted is often manipulated. They adjust this rate when they take into account certain debtor characteristics. These characteristics include the amount that is borrowed, the assessed financial strength of the business, declared collateral, the term of the loan, and the creditor’s credit rating. By taking into account all of these factors, lending institutions determine personal loan rates for each investor.

The primary factor lending institutions use in determining business loan rates is the amount that is borrowed. Loan rates are essentially a fee paid back to the lending institution for the usage of their capital for use in investment. Therefore the amount that is borrowed is detrimental to the determination of the rate at which the loan is issued. The less capital that is needed, the lower the rate at which the loan is issued. The greater the capital needed for investment, the higher the interest rate that is demanded.

A second and almost as important factor in determining a loan rate is the assessed financial strength of the business. This assessment is often based on the initial comparative analysis that an investor submits to the loan institution. This analysis portrays the assumed value of the ventured business opportunity based on similar business ventures in the surrounding or immediate area. It is a comparative analysis which means that the value of a particular business venture is based upon the surrounding or similar business ideas. It is, therefore, not a specific science. Values can vary greatly. It is important to generate the highest potential value possible in order to demand a lower loan rate.

The term of the loan is also important when determining the loan rate. Terms are often based on six or twelve or twenty-four month loans. The longer the loan, the higher the rates associated with those loans. For short term loans the rates are usually much lower. Many business owners use short term loans to purchase inventory, pay rent, or repair heavy machinery. Longer terms are associated with building acquisition or large scale renovations or expansions.

A final and sometimes most important factor in determining an individualized rate is the creditor’s credit rating. This rating a very similar to a person’s credit score. It is determined by a number of factors including current debt, current potential debt, available capital, and total current financial obligations. Loaning institutions use this rating to help determine a risky loan from a more secure loan. The higher the score, the more likely a bank will extend the loan. A lower score will not necessarily mean that credit will not be extended. However, it does mean that the rate at which that credit is assessed will be greater. Banks consider a number of factors before issuing their business loan rates including the length of the term, amount asked for, and the creditor’s credit score.

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