How to Qualify for a Low APR Business Loan in 5 Easy Steps
May 3, 2022
May 3, 2022
In this article, youâ€™ll learn:
If youâ€™re looking for a business loan, itâ€™s very important to minimize your interest and fees paid â€“ a few hundred basis points and a few thousand dollars in fees can have a huge impact on your bottom line.
A business loanâ€™s fees and interest are measured via their annual percentage rate (APR). Letâ€™s start by defining APR â€“ you can skip this section if youâ€™re already familiar with the term â€“ and then look at how you can get a low APR business loan.
The APR of a loan is essentially an annualized representation of the interest and fees paid over the life of the loan.
Hereâ€™s how it is calculated:
You add the interest and fees together and divide them by the principal. You take that amount and divide it by the number of days in your loan term, multiply by 365, and lastly, multiply by 100.
Letâ€™s look at an example:
You have total interest of $1,000 and fees of $100, which adds up to $1,100. The principal is $4,400. So, you divide $1,100 by $4,400, giving you 0.25. Your loan term is 600 days, so you divide 0.25 by 600 = 0.0004166667. You multiply 0.0004166667 by 365 = 0.1520833455. The last step is to multiply 0.1520833455 by 100, which works out to an APR of 15.208%.
You may be wondering:
What is a low APR?
There is no consensus definition of a low APR, as the type of business and economic environment heavily impact whether an APR is attractive or unattractive for a small business owner. With that being said, a single-digit APR is generally considered low for a small business in 2022.
Here are five easy steps to qualify for a low APR business loan:
A business plan gives you clear goals and objectives to guide your business over the long run. A business plan typically includes the following sections: executive summary, company description, market analysis, organization and management, service or product line, marketing and sales plan, funding request (if you are seeking funding), financial projections, and appendix.
After someone reads your business plan, they should understand how you want to run and grow your business â€“ and where you see your business in 5-10 years. While an excellent business plan is no guarantee of future success, it indicates that a business owner is making solid moves from Day 1. Since 45% of new businesses fail during the first five years, getting off on the right foot is crucial.
The bottom line is that a strong business plan gives lenders confidence in the long-term prospects of your business venture. This confidence decreases the risk of giving you a loan, which makes them more willing to give you a low APR loan (assuming youâ€™re doing other things right).
Your business credit score is a number between 0 and 100 that measures the creditworthiness of your small business. The three main business credit bureaus are Equifax, Experian, and Dun & Bradstreet.
There are several ways to build your business credit, but the average business needs 12-18 months to improve its business credit scoreâ€¦ so going from bad credit to good credit doesnâ€™t happen overnight.
With all that being said, there are some quick, easy ways to build business credit including:
You can have the best business plan in the world, but if youâ€™re just getting started on the road to entrepreneurship, lenders are going to be hesitant to give you a loanâ€¦ and really hesitant to give you a low APR loan. Generally speaking, an established business with steady cash flow is more likely to pay back a loan than a startup with inconsistent cash flow.
The minimum requirements for a low APR loan vary based on the type of loan and lender, but to give you an idea of whatâ€™s necessary, most Biz2Credit term loan customers get started with annual revenue of $250k+ and have been in business for at least 18 months. With rates as low as 7.99%, you can potentially get a low APR term loan through Biz2Credit if you meet the requirements.
This step isnâ€™t easy for some business owners, but if you have, letâ€™s say, $240k in revenue and 16 months of business history, you might be able to meet both requirements with a little effort over the next two months.
If your best friend asked you for a loan, you might agree to provide the money â€“ particularly if you could afford to lose the funds. But if a stranger asked you for a loan, youâ€™d probably say no. The difference is largely trust, and itâ€™s the reason why you may have an easier time getting a low APR business loan from a lender if you have an established relationship with them. This step is a long-term play, but fortunately, it isnâ€™t difficult to foster a relationship with a lender.
To qualify for a low APR business loan, you need to provide financial documents that show your business can handle the debt. Here are a few of the necessary financial statements:
Need help gathering the above documents?
Consider reaching out to a Certified Public Accountant (CPA) for assistance â€“ they can help your small business beyond tax season.
There are several low APR business loan options. Below, we look at a few of the most common ones.
The U.S. Small Business Administration (SBA) 7(a) loan program allows qualifying small businesses to access up to $5 million in funding, and the SBA guarantees a large portion of the loan. To qualify for an SBA 7(a) loan, you need to meet a number of requirements including the following:
Itâ€™s tough to qualify for an SBA loan (due to stringent eligibility requirements) and you might have to wait months to get an approval or denial decision, but the reward is a loan with an artificially low interest rate â€“ due to the SBA guarantee â€“ which pulls down the APR.
A term loan provides borrowers with upfront cash to be repaid at predetermined intervals at a variable or fixed interest rate. As stated earlier, Biz2Credit connects small business owners with term business loans at attractive rates. These loans usually have payment plans ranging from 12 to 36 months with loan amounts of between $25,000 and $500,000.
You can use a term loan for a broad range of business needs, including new equipment, real estate, and other business assets, making them a solid option for many small business owners.
A business credit card probably isnâ€™t the first thing that comes to mind when you think of low APR business loans, but hereâ€™s the thing: some business credit cards offer 0% APR introductory periods. This introductory period typically lasts for between 6 and 18 months, which means that you can maximize the benefit by getting the card when you have several upcoming purchases.
That APR wonâ€™t stay low forever, though, so make sure youâ€™re well aware of the expiration date â€“ you could otherwise be stuck paying a double-digit APR.
A business line of credit allows a small business owner to borrow only what is needed and only pay interest on the amount of money borrowed. These characteristics make it one of the most flexible small business financing options. Itâ€™s possible to get a low APR loan through a business line of credit, as the interest rate can be 10% or lowerâ€¦ but the rate can also be as high as 25%. And you may not know your interest rate ahead of time, as business lines of credit often come with variable interest rates.
But hereâ€™s the good part: you donâ€™t have to use a business line of credit. You can turn to another type of business loan if the rate is too high when you need the money.
Alternative lenders have proliferated over the last few years, using technology to streamline the lending process and bring business financing to a wider range of borrowers â€“ many of whom are unable to get financing from traditional banks.
The faster approval and looser requirements usually come at a cost: a higher APR. But itâ€™s possible to find online loans with relatively low APRs â€“ particularly if you have an excellent business and find a good online lender.
To qualify for a low APR business loan, you essentially need to have a great business that seems low-risk to small business lenders. In addition, you have to convey to lenders that your business is financially healthy. This can all seem a little overwhelming, but qualifying for a low APR business loan is very possible if you break it down step-by-step
Want a business loanâ€¦ but donâ€™t want to wait months to get a decision? Biz2Credit can quickly provide you with small business funding, with a streamlined business loan application process.
Weâ€™ve helped many small business owners get financing, including Raza and David Bolos, a husband-wife duo that sought funds to open a bakery. Biz2Credit delivered with an â€śunbelievably quickâ€ť turnaround time, according to Raza, and â€śthere was no waiting period like [she] experienced with other lenders.â€ť
Learn more about how Biz2Credit can help your small business qualify for a low APR loan.
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