Business Consulting

How to Understand Business Loan Rates & Fees

Women-owned small businesses make up 11.3 million businesses in the United States, 45 percent more than in 2007, according to the 2016 State of Women-owned Businesses Report by American Express Open. However, nearly half seek financing from outside sources, according to the Center for Women’s Business Research.

 

As any business owner knows, you need money to make money. When it comes to financing a small business, there is no standard way loans are presented. As big banks move away from funding small businesses and few regulations exist for small business loans, there is plenty of space for online payday lenders to blur the lines and not disclose all of the rates and fees of a small business loan. It’s easy to become confused and overwhelmed by the various options.

 

The original post was published on the StreetShares Blog here.

 

How Do You Pick the Right Financing for Your Small Business?

 

This guide will help you understand different business loan rates and fees and what to look out for. Click here to download a quick guide that explains loan rates and fees from StreetShares now.

 

Interest:

Interest can be described as the proportion of a loan that the lender charges the borrower as compensation for the loss of the asset’s use; essentially, what the lender charges on top of the principal of your loan. This amount is expressed as a percentage rate (e.g., 12% interest on a $10,000 loan).

An important aspect to note here is that interest does NOT include any extra costs to your loan, such as origination fees, application fees, etc. In addition, the amount of interest the lender charges varies based on how risky they believe your company to be. The lower risk they deem your business, the lower the interest rate; the higher the risk, the higher the interest rate.

 

Annual Percentage Rate:

The Annual Percentage Rate (APR) is how the annual accumulation of the interest rate and other fees attached to the loan is expressed. It is the total rate you’ll pay on your loan. While the interest rate can be considered the bare-bones amount you owe, the APR takes every fee associated with the loan and expresses it as a complete annual calculation. And as the name suggests, it is written as a percentage.

While it might not always be in your best interest to pick a loan with the lowest APR, it is helpful to note you can absolutely ask lenders to disclose this information to you in your research. Bottom line, the benefit of the APR is the baseline evaluation it provides.

Click here to find out how to compare your business loan options. Additionally, use an online calculator, to help you determine your total APR cost when shopping for loans.

 

Factor Rate:

The factor rate is the total cost of borrowing divided by the loan amount. It is expressed as a decimal, usually ranging from 1.1 to 1.5 depending on a variety of causes — such as how profitable you are, how long you have been in business, and your average monthly sales, to name a few.

A key element to help you understand factor rates is that time is not accounted for when it comes to the total cost you will owe. Unlike interest rates, which are calculated numerous times based on the number of payments you make as your loan decreases; factor rates are calculated one time based on the original principal of your loan.

In order to figure out the total amount you will owe on your loan, you need to multiply the amount you are borrowing by the number the lender presents to you. For example, if you are requesting a $10,000 loan at factor rate of 1.5 for 12 months, the total amount you will owe is $15,000.

Conversely, to try to determine the factor rate of your loan, you can divide the total financing costs by the loan amount. So, again, if you are asking for $10,000 and the lender says the total is $11,600, you can determine the factor rate is 1.16.

The tricky part about factor rates is that they can make loans look less expensive than interest rates; however, as you are asked to pay the equivalent of an “interest rate” up front, these type of loans can ultimately be more expensive and there is no available benefit for paying the loan off early.

 

Other Loan Fees

There are a few other fees that can show up at the culmination of the loan process, which we’ll explain a few below.

Origination Fee

This is an up-front cost that the lender charges to cover what it takes for them to process the loan. This will vary from lender to lender based on their particular administrative needs.

Application Fee

This is an additional cost you may find that relates to processing your loan application. It usually includes any credit checks necessary to determine if you are approved for the loan, among other things.

Guarantee Fee

This only applies to you if you are applying for a Small Business Administration (SBA) loan. Since the SBA does not actually offer loans, but instead guarantees them to other lenders, there can be a cost associated with that relationship to the lender. Therefore, some lenders may place that fee on the borrower as part of the loan cost.

From Business Plan to Business Financing

Just like creating your business plan or marketing campaigns to figure out the best course of action and best ROI, women small business owners should always determine the most cost-effective loan.

Ask the lender to show you all the costs associated with the loan – including interest, origination fees, servicing fees, the full APR, as well as any early prepayment penalties and other costs.

Know the full contract when you sign. The financing of your loan has some of the most crucial long-term effects on your business, so being informed and choosing lenders wisely can be one of the most important decisions you make.

Ready to take the next step to seek funding for your small business?

StreetShares, Inc. helps women-owned businesses get a fair deal by disclosing every rate, fee and even review the whole cost of the loan to each customer. Sometimes getting a loan may not be the best option for your business. And StreetShares will tell you and let you know about other options to think about.

If you’re a veteran-owned small business, the StreetShares Foundation that focuses on inspiring, educating and supporting veteran small business owners, provides up to $5,000 in monthly grants.

One Her Corner member who is already enjoying a great deal of success conferred with StreetShares to review their funding needs and options. Ultimately, StreetShares recommended a unique opportunity to access additional capital through an existing equity investor. Although such opportunities can be rare, this one was a worthwhile proposal to analyze. StreetShares ensured the Her Corner member understood how to properly interpret the cost of the loan and other implications. The member greatly appreciated the unbiased insight and realized the best fit for StreetShares could be in a future line of credit to purchase additional inventory when needed.

Not ready to seek financing? Get the ebook, “The Basics of Financing,” to learn more about how to determine your financial needs, reasons why you may or may not need funding, types of funding available and what documents to prepare. Download it now.

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