Acquiring a loan for a small business can be a great way to capitalise on growth opportunities and ensure that operations run smoothly. Leading financial institutions have made a loan for a small business more accessible than ever, allowing you to get the funding you need easily.
However, it is essential that you plan for the loan to ensure that the repayment does not cause any undue financial stress. An important factor to consider is the business loan rate of interest . Interest rates offered depend on your eligibility, business type, and lender’s policy.
When you do not qualify as per the lender’s terms, it can even lead to rejection of your application. If not, your business loan rate of interest can be high. This can result in you paying a higher cost and even a higher EMI. However, you can negotiate and strategize for a lower interest rate.
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Read on to learn about some of the top tips to negotiate a lower interest rate for a loan for a small business and keep the funding within your budget.
Assess Your Business
The performance of your business and your business plan both play a pivotal role in determining your repayment strength. As such, you need to assess these elements before you apply for a loan for a small business. Doing this will give you insights into the strengths and weaknesses of your business.
Once you know this, you can prepare and highlight the strengths and ways to mitigate the risk. This will lower your overall risk and can help you position the business better in the eyes of the lender. This can be enough to qualify the business for an attractive business loan rate of interest.
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Research and Compare
Today, a majority of financial institutions offer a loan for a small business. This makes the market competitive and gives you a host of offers to choose from. As such, it is your responsibility to do the due diligence and choose a lender that offers the funding you need at an affordable cost.
Go through the terms and conditions of numerous lenders to better understand the cost. Compare the borrowing costs by using a loan EMI calculator. Choose the terms that are most comfortable and approach the lender with that information in mind.
Leverage Your Credit Score
Your credit score is crucial to your creditworthiness and, by extension, an indication of your repayment capabilities. This is why many lenders even require you to have a minimum score, generally 750, to be eligible for a loan for a small business.
If you have an excellent credit score, close to 900, you can leverage that to highlight your creditworthiness and lower your risk. This will enable you to not just acquire an attractive business loan rate of interest but also a possibly higher quantum of funding.
So, if you don’t have a credit score close to 900, take steps to remedy that and work toward it. This includes closing a loan account, repaying on time, and more. Remember that you may not see an immediate effect on your credit score, and as such, you will need to plan your current finances accordingly.
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Offer Collateral
Many lenders offer a secured loan for a small business to offset their risk. A secured loan means you have put up collateral with the lender, that they can liquidate if you fail to repay the loan.
Given that their risk gets minimised, lenders are less hesitant to offer an attractive business loan rate of interest in this case. So, if you need funds immediately and you do not wish to go with an unsecured option, pledge an asset. This will improve your chances of approval and will help you get a desirable rate.
Do keep in mind that doing so also puts your assets at risk. In instances of downturn or emergencies that cause you to default on payments, lenders will claim ownership and recover losses.
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Choose the Optimal Repayment Tenure
Modern lenders will offer a loan for a small business with a flexible tenure, lasting several years. This typically goes up to five years, and the tenure you opt for matters. Generally, shorter tenures are better, since the interest outgo is minimal. However, this may increase the risk of lending, especially if the business’ revenue isn’t consistent.
Lenders will take this into consideration, and offer a higher rate to offset the risk. On the other hand, a lengthier tenure reduces the EMI outgo, but could cut into profits. This is because you end up paying interest for longer, and so the cost of borrowing increases.
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As a business owner, you are likely to choose the most cost-effective route, but this may not help you get the best rates. So, when deciding on a tenure, choose one that is both cost-efficient and fits comfortably with the business’ monthly cash flow.
Prepare a Negotiation Plan
Lastly, prepare and plan your strategy before approaching or reaching out to the lender. Being prepared gives you the knowledge to negotiate efficiently with the lender. To a certain extent, this will also help boost the lender’s confidence in you. Some lenders will require a business plan to approve the sanction.
As such, you must have a clear goal to secure a low business loan rate of interest. Consider this as a business deal and map out various plans of action and points that you need to highlight. Having clear and realistic targets, which you can use to negotiate for the funds you need.
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Remember that the business loan rate of interest levied by lenders depends on the risk of lending to you. So, be sure to aim all your strategies around showcasing a low default risk and an excellent repayment capacity.
Now that you know how you can negotiate the interest rates on loan for a small business, do your due diligence before applying. By doing so, you can meet your current needs and work towards growth while protecting your future finances.
Moreover, by carefully planning your loan, you can make timely repayments and keep your creditworthiness intact. This can open new lines of credit, which can play a crucial role in facilitating the growth of your business.
