What Small Businesses Must Know About Commercial Loan Interest Rates

small business commercial loan interest rates

Are you thinking about getting a commercial loan? Before getting a loan, consider commercial loan interest rates. 

Interest rates can determine whether can pay back the loan. If the rate is too high, you stand a high chance of defaulting on the loan. 

The interest rate primarily depends on your personal and business profile. On a macro level, the markets and the economy will determine the lender rates. 

The article will provide an in-depth view of commercial loan rates. Let's explore small business commercial loan interest rates in greater detail now. 

Commercial Loan Rates Today 

As of 2020, interest rates are low. Moreover, the current rate depends on what type of loan you're getting. The current interest rate system breaks down as follows: 

• Conventional Bank Loans: For loans starting at $25,000, you can get a rate starting at 5%. 

• SBA 7(a) Loan: Current rates for an SBA loan vary between 5.25% and 9.25%. 

• 504 SBA Loan: Average loans in this category currently stretch from 4.38 to 4.49%. 

Average Rates 

Commercial loan rates depend on what type of loan you're getting. If you have an SBA loan, for example, the average rate on a 504 loan is between 3.91% to 4.25%. 

A 504 loan allows borrowers to purchase land/buildings or conduct renovations. Under a 504 structure, the SBA guarantees 40% of the loan amount, with the lender covering 50%. The borrower will usually cover the remaining 10%. 

For a 7(a) loan, the interest rates are typically between 7.75% to 10.25%. 

Under the 7(a) program, borrowers can get a guarantee of 85% for financing up to $150,000 and 75% for loans that are more than $150,000. The 7(a) is the standard program for most SBA borrowers. Under an SBA loan, the lender will set the rates, but the SBA caps the interest rates. 

For 7(a) loans, the rates usually come with a variable rate, but it may come with a fixed rate. 

Rate Tiers 

Whether the loan package is SBA-guaranteed or not, lenders adopt different rate tiers to borrowers. Consider the following tiers: 

• The Wall Street Journal Rate: This rate entails the lowest rate for borrowers, and lenders usually give this rating to their most valued customers. The rate derives from the Wall Street Journal's survey of large banks and standard interest rates. 

• SBA Optional Peg Rate: This rate applies to the caps on interest rates that SBA-approved lenders must abide by. It also applies to loan rate maturities that match SBA loans. 

• One Month LIBOR: LIBOR refers to the London Interbank Offered Rate. It refers to London wholesale markets, a place where banks lend to each other. 

As such, these rates constitute a base rate. After, the lender establishes markups that will increase the rates. For SBA loans, the markups cannot exceed any maximum rates imposed by the SBA. 

Factors That Determine Interest Rates 

In addition to credit and income, lenders will determine the credit score based on the type of business you have. If you're in a riskier industry, lenders may impose a higher interest rate as a hedge against risk. 

Another factor that affects the score is how much you're borrowing. Borrowing higher amounts of money may come with a higher interest rate because lenders fear the possibility of default. 

Therefore, only borrow what you need and what you can afford to pay back. You can use a commercial loan calculator to know the payments and interest rates upfront. 

Moreover, the interest rates also vary with the lending institution. If you're currently looking for a lender, visit https://www.farmersbankidaho.com/ to get more information on commercial loans and rates. 

Overall, institutions have a specific set of guidelines that mandate minimum and maximum rates. 

Note: To get a lower interest rate, many lenders prefer borrowers with an individual score in the high 600s or 700s. 

Additionally, many lenders will look at a company's business score. Companies have business credit scores like individuals do, but there's no FICO equivalent of business scores. 

Commercial credit bureaus have different standards of reporting business credit. Your business credit score stems from such factors as: 

• The type of industry you're in 
• How you pay your bills 
• How fast you pay your bills 
• How much debt you have 

The minimum business credit score depends on the lender's guidelines, but you can boost your credit score by paying down debts and paying on time. If your business has higher debts, you may pay a higher interest rate, and you could face rejection if your debt is too high. Further, late payments are red flags to lenders, resulting in a higher rate. 

Market Rates 

In many cases, the rate you receive is entirely out of the bank's hands. Above all, the interest rates are set by the Federal Reserve. If the Fed wants to bestow lower interest rates to spur economic activity, for example, the banks will do the same. 

In fact, banks prefer to offer lower rates during times of economic distress to encourage consumers to borrow. Also, you may get a lower rate due to competition among other lenders. Other market factors that determine interest rates include:

• Inflation 
• Money demand 
• Money velocity 
• Stock market indicators 

Moreover, banks assess interest rates based on economic conditions, such as gross domestic product (GDP). 

Commercial Loan Interest Rates: What's the Verdict? 

Overall, commercial loan interest rates today at historic lows. The type of loan interest rate received depends on business profiles, market conditions, and economic indicators. That said, consider whether the loan is fixed or variable, as variable loans come with fluctuating rates that could change your payments.

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