Getting a Commercial Loan at Low Interest
Shopping around for a commercial loan with a low interest rate is not easy peasy. Several factors affect the interest rate of a loan. These include your credit score, loan amount, loan term, interest repayment type, collateral and down payment. The loan rate and fees also differ from one lender to another. It is important to compare different business financing deals from several lenders before settling with one.
What is a Commercial Loan?
A commercial loan, also called a business loan, is a type of financing that’s intended for business use. It is used for various business projects, including the purchase of a new commercial property, hiring of additional staff, and the buying of a business vehicle or office equipment.
The interest and terms of a commercial loan may differ between you and another borrower, even if you get it from the same lender. This is because your unique credit standing and financial situation—as reflected by your income and assets—affects your loan conditions. The amount of money you want to borrow, as well as the collateral and down payment also influence your loan's terms and interest rate.
5 Tricks to Get a Business Loan With a Low Interest Rate
1. Improve your business credit score
Did you know that your business has its own credit rating? Your business builds its credit history and score when you use a business credit card to pay for commercial transactions, take out loans for corporate and trade projects and pay your office bills and taxes.
Unfortunately, most Aussie business owners don’t know their business credit score and its importance. According to research from MYOB and small business lender OnDeck, 93% of business people in the country have never accessed their business credit score.
Your business credit history and score are assessed when you’re seeking financing for commercial purposes. They greatly affect your borrowing power, not only influencing your approval chances but also your loan’s interest rate and loan terms. The higher your business credit score, the better loan deals you can get.
To build a good business credit score, work around these five factors that lenders look for when assessing your loan application:
- Time in the Business. Banks are more willing to lend loan money, even millions if your business has been around for at least 2 years in the industry. This length of time is good enough to show that your business is stable enough to stand on its own and survive the ups and downs of entrepreneurship.
- Payment History. Your pattern of bills and debt repayment will be scrutinised. Payment delinquencies will be frowned upon by lenders as they suggest irresponsible credit management. If you want to improve your payment history, make sure to make timely payments for your credit card and other utility bills, as well as for other active loans you may have. Consider automating your payments with online and mobile banking so you won’t miss payment dues on your credit card or active loans.
- Credit Mix. Having a variety of credit suggests that you can appropriately manage your finances and debt obligations. Have a good mix of credit by using a business credit card, opening a line of credit with vendors or suppliers that you work with regularly and taking out instalment loans.
- Credit Utilisation Ratio. Using your business credit card near or beyond its credit limit will increase your credit utilisation ratio, which suggests overreliance on your credit line and financial trouble. Limit your business credit card usage to 30% or lower of its credit limit.
- Errors in your business credit report. Erroneous information on your business credit report, like repayments that you’ve paid on time but were wrongfully reported as late by your previous lenders, can significantly hurt your credit score. Thus, it’s essential to check your business credit report regularly to look for errors and dispute issues you may find. Do this at least once a year or every six months to keep up to date with your business credit.
2. Get a commercial loan from the bank.
If you have a good credit score, you can easily secure a business loan from the banks, which typically offer the lowest rate and best terms. The average business loan rate in Australia is around 5 and 7 %. The bigger the amount of money you borrow, the lower your interest rate is likely to be. Banks are always competing for customers and so each one is offering loan deals that are in line with what their competitors are offering.
Aside from a good credit score, having an account in the bank that you’re planning to take out the business loan also helps. Because the bank has access to your financial records, running a financial background check on you is easier.
3. Get a secured business loan.
Pledging an asset as collateral for your loan not only increases your chances of approval but also helps you get better terms and a lower interest rate. This is because your lender has a stronger assurance that you will repay the loan. If you’re unable to, the asset will be repossessed and sold to recover their money.
The value of your collateral will be evaluated. The value of the collateral will be deducted to the total cost of your loan while the remaining equity will play a factor in the lending decision.
For your asset to be accepted as collateral, it must be:
- Not subject to large price fluctuation
- Easily transferable
- Value is easily ascertained
4. Go for the long term.
A long-term loan of around 3 to 30 years will give you a lower interest rate because it will be distributed over the life of your loan. This makes the total cost of the loan seem more affordable. However, you would also be paying way too much interest for a very long time.
A short-term loan of around 1 to 2 years has a higher interest rate than a long-term loan. However, you can save more on interest in the long run because you will stop paying for it once your loan has been paid off.
5. Get a variable interest rate.
Your loan’s interest rate can be fixed or variable. A fixed-rate remains fixed for the entire loan term, which results in a uniform amount of repayments. A variable rate, meanwhile, changes according to the market conditions, causing your repayments to vary over the course of your loan.
A fixed interest rate may be more beneficial if you want to have certainty in your repayments to manage your cash flow better. On the other hand, a variable rate is more advantageous if you want to take advantage of the timely low interest rate and plan to have your loan only for a short time. You can also make extra repayments on top of your scheduled instalments without penalty, helping you cut down the length of your loan term and reduce your overall interest charge.
Some Final Thoughts
Just because a commercial loan has the lowest interest rate doesn’t mean it is the best deal for you. Sometimes, it has a lot of hidden fees that significantly add up to the total cost of your loan. Other times, it’s laden with unfriendly loan terms that cause financial stress and anxiety. Thus, it’s important to shop around for business financing deals and compare interest rates, loan terms and other fees before settling for one.
Before taking out any loan, it is smart to calculate what you can afford to repay. You can use a loan calculator to get an intimate of your loan cost based on your credit score, desired amount to borrow and preferred loan term. You can also check your business’ previous financial performance and your cash flow forecasts to determine its profitability.
Ask your prospective lender to outline the different commercial loan term options in detail before choosing the right one for your business objectives and financial situation. Also, include all the charges that are associated with your loan to determine its true cost. These include the establishment or application fee, valuation fee if you're taking out a secured loan, ongoing monthly fees, late and early repayment fees and exit or closing fee.
You can also consult a commercial loan expert to discuss in more detail which business financing suits you best and to answer all your questions regarding loans.
Positive Lending Solutions is an award-winning Australian finance broking company that teams up with various lenders across the country to find the right financing for you. We have a team of commercial loan experts that can find the best interest rates and terms for your business financing.