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How to figure out what kind of rates you can expect for a business loan

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Obtaining a business loan is not too hard as long as you know what effects a rate for a business loan. Do you know how your bank determines the loan rates and amount? Loan rates and amounts are determined by the risk factor a client brings. Defining the loan rate is difficult for loan pricing since many factors come into effect. Credit-scoring systems are the most popular type and can quickly compute a risk factor for a loan.

The computer sets up a default premium with a specified cut-off point and group's potential clients into these groups. If your credit score falls into a certain category it can make a big difference in the loan rate. For instance, if you have a low credit score in the 500's, you will have a hard time getting a loan and if you do get a loan, you will have a hard time negotiating a loan rate.

The other factors that help determine the loan rate and loan amount are the collateral required and the term of the loan. If a loan is secured with collateral, the risk of default is lower. It is better to give a loan with a car as collateral than credit card debt. The more valuable the collateral the better your loan rate and loan amount will be. If you use your house versus a car, obviously it has more value and the bank will take that into effect.

Keeping your debts low and having a high credit score are the easiest way's to get a loan. Keep in mind what you or your business can afford each month so you do not get in over your head. Discussing options with a financial advisor is another way to look at loan rates and what you qualify for before heading to the bank.

A bank looks at many different factors when determining a loan and the rates and amount of the loan. Before you begin looking at a loan, you need to ask yourself what you can afford or what the company can afford. To determine this, you need to make a list of all the expenses your company has like: rent, salary, utilities, entertainment, etc. Once you see what is left over, you can determine how much your loan amount should be.

Banks typically put you into a category of risk to determine to cut off amount you are in for a particular rate. In order to work with your bank on obtaining a certain rate, you need to have a few documents ready. You will need to have the following ready when discussing financing options with your lender:

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  • Business financial statements

  • - Business tax returns

  • - Business plan with budget or projection

  • - Personal financial statements

  • - Personal tax returns

Your bank will then ask your questions about your company such as cash flow management, AR management and your company's financial future. If you take time to prepare a speech before hand you will be much more impressive to the bank as they review your application. Give detail why you need the money and what you plan to do with it.

Since there is no hard evidence as to what determines your business loan rates, you should be prepared to negotiate with the bank. The length of your loan as well as the type of loan will all affect the rate you get on your loan. Work hard on having a good personal credit score and a business score as well since they are the main things a bank will look at to determine your business loan rate.

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