For small businesses, credit is one way to weather recession. Most of the small businesses need loans also termed as microloans for small businesses in the banking industry, in-order, to deal with short term financing. There are many variables that make it difficult to find favorable terms on small business loans. The variables are like borrower’s credit rating, prime interest rate and other specific terms.
The prime rate set by Federal Reserve is the major determinant for the interest rate of small business loans. The rates also rise and fall in accordance to inflationary concerns and the overall need of credit by the economy. The small business administration also provides subsidized loans to many small businesses through 7(a) loan program. The rates are prime plus an additional 2.25 percent to qualified lenders.
Rates Influenced by Forces
The situation of every lender and each loan is different although a completely different picture of interest rate of average small business loan is staged nationwide. The credit history and relationship of businesses with banks have a major role to play as regards the rates received. Small business loan interest rate depends on amount borrowed and the length of the loan. Larger short term loans normally receive better interest rates than smaller loans.
Business Loans and Personal Loans
Some business owners also turn to personal loans. This mostly happens when they do not have good credit history or have established themselves not very early enough. So, they turn to personal loans to finance their companies. Although the rate is determined by general forces influencing small business loans – like prime rate, loan size and the borrower’s credit score, but financing is done differently in case of personal loans. Depending on the structure of business and loans, owners may have to repay personal loans as income from other business sources along with taxes.
This article was submitted by Rohit Arora, co-founder of Biz2Credit. Biz2Credit is a small business marketplace that connects entrepreneurs with financing options and advice to grow their business. Send all questions to