Business Loan Interest Rate

What are the 7 Biggest Mistakes That Can Hurt Your Business Loan Interest Rate?

Errors or mistakes in planning and maintaining your credit history can result in higher business loan rates. Your personal or business credit rating are the most important factors in determining your loan approval and the cost of borrowing. A blunder when you’re looking into possible business lenders can be costly. You can cost yourself thousands, set the timeline for getting your money back by weeks, or even lose a loan opportunity altogether. So it’s vitally important to avoid any of these all-too-common mistakes that end up raising your business loan interest rate.

Mistake #1: Not tending to your personal credit

You might think your student loans or car payments can’t affect your business loan interest rate, but that’s unfortunately not the case. Many business loan providers will require you to hand over your personal credit report before they’ll consider making a loan for your small business, and that score matters greatly as the provider decides whether to lend you money and at what rate. So consider your business prospects with each decision you make in regards to your personal finances. Sure, that clothing store will give you a 10% APR if you apply for their new credit card, but is that new account inquiry going to cost you money hand over fist when it comes to your business loan interest rate? Or maybe you’re considering closing an old credit card account. Will closing an old account lower your available credit and therefore hurt your personal score?

Mistake #2: Not reviewing both credit reports

And speaking of your personal score, it can be very easy to simply submit your personal and business credit scores without thought – after all, the process of getting a loan is often long, tedious, and time-consuming. This seems like an easy step, right? Failing to catch an error on your report could cost you thousands in interest payments if the lender is making their decision based on faulty information that’s showing up on your credit reports. Even an error as seemingly insignificant as a mistake in a business address can make the potential lender see you and your company seem less trustworthy.

Mistake #3: Impatient or incomplete research

Take your time researching the different loans and financing options available to your business before you jump in with both feet. The internet is a big place; there’s a ton of information about loan options that can seem impossible to keep straight. It can be appealing to simply latch onto the first loan that seems to fit with your needs. But this could be a grave error and your business loan interest rate can suffer for this mistake. It may require some organization but laying out all of your options in a spreadsheet before you begin the application process is a fantastic way to see the whole picture. Also, don’t be afraid to ask for help and advice from the financial community and your local business community. Ask business owners that you trust about their experiences, good and bad. Ask about their options, how they found those options, and if they have any regrets about the decision they ultimately made. More information will allow you to make the informed choices that will keep your interest rate low.

Mistake #4: Picking the wrong type of loan

Often the result of the previous issue, picking the wrong type of loan for what you need can badly damage your business loan’s interest rate. You should always make sure you’ve considered all of the different types of business loans before making your choice. Maybe you opted for a merchant cash advance to buy a new piece of equipment because they’re faster and more flexible than an equipment loan. If the equipment wasn’t vital, you could end up paying much higher costs as a result. Or consider the reverse. Maybe your business absolutely needs a piece of equipment immediately and you go for an equipment loan. Depending on the equipment, the time lapse between application and approval (or denial) can create a huge cash flow issue because your business is lacking a tool that it needs. To paraphrase Shakespeare, there are no business loans that are either good or bad, but choosing the right or wrong purpose makes it so.

Mistake #5: A lackluster business plan

This is a double mistake that can hurt much more than just your business loan’s interest rate. In a more practical sense, an imperfect, short-sighted, or illogical business plan is grounds for a lender to increase your interest rates and even deny you funding itself. As always, remember that a business loan is, at its core, like placing a bet on your company. A lack of foresight on your part tells the potential lender that your company isn’t a smart investment. But in addition, great business plans mean putting lots of logical thought into your business’s needs and trajectory in general. So even if you’re not applying for a new loan, writing a great business plan is a worthwhile, even necessary, exercise for business owners.

Mistake #6: Financing endeavors without measurable return metrics

Most businesses borrow money more than once. The second loan could be used for anything from a new location, new equipment, a second point of sale, or more employees. Regardless, you should keep future loans in mind when borrowing money because using a loan in a way that doesn’t show a performance boost is a mistake that will damage your future business loan terms and interest rates. Ask yourself: will my planned uses for this loan increase revenue or profitability? If not, consider the fact that future lenders will see the lack of measurable return on that initial investment. They could choose not to lend further or could choose to boost your borrowing costs in order to solidify their position. Increase revenue or maximize profitability. How can you use money from your business loan to do either, or even both at once? Think specifically about this question before you apply.

Mistake #7: Not taking risks

Have you ever offered to help a friend move into a new place, then found upon arrival that your friend hadn’t even started packing? They want you to help at all stages of the move instead of taking responsibility for their own part. That’s how lenders can feel when they look at a business owner who hasn’t invested in their own business. Even if the owner isn’t able to make a huge monetary investment, it can hurt your business loan interest rate if you haven’t offered up business loan collateral like a vehicle, home, or piece of equipment or put your home up as collateral against a debt. If you don’t have any skin in the game, why should your lender include theirs? Ask yourself how you can show a lender that you’re all-in. Such a display will improve your interest rate, which will keep more cash in your pocket – and your business’s bank account.

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