November 3, 2021 | Last Updated on: June 28, 2023
Looking for a low APR business loan? Good news! There’s no shortage of them on the market. The decision you’ll have to make is which low APR business loan is best for your situation. From SBA loans and term loans through traditional lenders to the convenient online loans offered by alternative lenders, each has its pros and cons. Read on to learn:
In no time, you can have the affordable funds you need to grow your business deposited in your bank account.
First things first, when you take out a business loan, it’s not usually free. Lenders require you to pay interest and fees in exchange for the loan which are communicated using an annual percentage rate (APR).
An APR is calculated by adding the loan fees and interest together and dividing them by the principal. Then, you divide that amount by the number of days in your loan term, multiply the amount by 365 and then multiply it by 100. Here’s an example.
Example:
Loan amount: $5,000
Total interest charged: $500
Loan origination fee: $50
Loan repayment term: 24 months (730 days)
APR calculation:
$50 (fees)+$500 (interest)=$550
$550/$5,000 (loan amount)= 0.11
0.11/730 (repayment term)=0.00015068
0.00015068 * 365 = 0.055
0.055 * 100= 5.5% APR
For this business loan, you’d pay 5.5% of the principal in interest and fees each year of your repayment term.
The average interest rates on both variable- and fixed-rate conventional small business term loans and lines of credit ranged from 4.32% to 8.22% in 2020, according to the Federal Reserve Bank of Kansas City. However, the traditional lenders that extend these loans often have strict eligibility requirements and extensive approval processes.
If you’re looking for a quicker, more convenient way to borrow for your small business, many alternative and online lenders have cropped up. While the interest rates are often higher, you can still get a competitive rate if you have a good credit score and strong business financials.
The interest rates for online or alternative lenders can range from around 8% to around 70%. Being so, an APR under 15% is considered low. At Biz2Credit, we offer APRs starting as low as 8.99% and make it easy to find out the rate you qualify for online in minutes.
Here’s a closer look at the different types of low-interest small business loans you can get and the pros and cons of each.
One of the biggest benefits of SBA loans? The interest rate caps. Keeping business lending affordable is a top priority of the U.S. Small Business Administration. For example, when looking at the standard SBA 7(a) loans, the interest rate will range from the prime rate plus 2.25% to the prime rate plus 4.75%. The more you borrow, the lower your rate.
The reason the rates are so low is that the federal government’s program is offering a guaranty for the loan to its approved lenders. In other words, if you default, the government will pay the lender a large percentage of what you owe. Other loan programs don’t have this backing so lenders face more risk when extending loans.
The main downside to SBA loans is that they require you to jump through many hoops. You have to apply and get approved by an authorized lender and then must also get approved by the SBA. The result is a process that can take several months. However, if time is not a pressing issue and you don’t mind all of the paperwork, SBA loans can be a great solution for low APR business financing.
Traditional lenders are financial institutions including large and small banks, community banks, and credit unions. While these lenders often offer low APR business loans, they can be difficult to get. In many cases, the application and approval processes are manual. A representative from the bank will work with you to analyze your situation and decide if they will approve you.
Further, you will often have to meet strict requirements such as several years in business, a high required annual revenue amount, and a minimum credit score that’s at least “good.” Once again, if you don’t mind a lengthier application process and can wait to get your funds, and if you have a strong credit history and solid business financials, going through a traditional bank could be a good solution.
Alternative lenders are those that operate outside of the traditional system. They are often financial companies that are based online that have developed advanced technology to streamline the lending process. Small business lenders like Biz2Credit can process your online application in minutes, give you a decision within 24 hours, and get you funded within 72 hours.
How do alternative lenders work so fast? They typically have advanced algorithms that assess a borrower and approve or deny them based on a number of factors. Going this route is often especially advantageous to those who may not get approved for an SBA loan or a traditional loan because the eligibility requirements are more flexible.
While low interest rates are available for well-qualified borrowers, many alternative lenders also make funding available for those who have less time in business, lower annual revenue, or fair-to-bad credit. While the APR may be higher, they’re opening the opportunities that business financing brings to a wider range of business owners in a very convenient way.
The right fit for you is going to depend on your situation. As mentioned above, a few big factors are your level of urgency, your willingness to jump through hoops, and how much risk your business presents to lenders.
When evaluating your application for a business loan, lenders will often consider a variety of factors. Their goal is to assess the likelihood that you will pay back your loan in full versus the risk that you will default. The more reliable you appear, the better rates and terms you can get — including your APR. So, what factors help to make your case as a reliable borrower?
Most business lenders will require a personal guaranty on a business loan from one of the company’s majority owners. That means one of the owners will need to provide their personal information so their credit can be checked. This will be a major factor in approval or denial, as lenders want a trustworthy person on the loan to ensure it gets repaid.
Most lenders will mention the minimum personal credit score they require for approval, and it often ranges from 580 to 680. If you provide a personal guaranty, that means you will be responsible for the loan if the business can’t make the monthly payments. In the case that your business has multiple owners, consider who has the strongest personal credit profile before applying.
Next, in order to qualify, you will often need to show that your business can repay the loan using its revenue. Being so, most lenders will require you to prove you make at least a minimum amount per year. They usually request bank statements, profit and loss statements, or tax returns.
Another factor will be your time in business. As you can imagine, lenders want to ensure you have an established business that is stable and will remain profitable and open at least long enough to repay your loan. Many traditional lenders will want to see at least two years in business while some alternative lenders may allow shorter time periods.
Unfortunately, startups will often face a hard time getting business loans as they are very high-risk. A better route for a new business can be to look for investors or to look into SBA startup loans.
You can also improve your odds for approval by applying for a loan with a lender with which you already have an established relationship. For example, if you continue to borrow with the same lender over time, you will build more trust with them by consistently fulfilling your obligations. Further, if you’ve had a checking account and credit line with a bank for several years, they may be more likely to lend to you at a better rate.
The bottom line when it comes to getting a low APR is proving that you are a low-risk borrower. You need to be able to prove that you are trustworthy and are highly likely to repay your loan. Good credit, a stable business, and strong financials will all help your case.
While a low APR is important, as it determines how much a small business loan will cost you, it’s not the only factor to consider when weighing financing options.
Before signing on the dotted line, also consider the types of loans a lender offers. For example, business lines of credit may work better for your situation than a lump sum term loan. Or, you may find invoice financing, equipment financing, working capital, or merchant cash advances are a better fit.
Further, find out about the lender’s service quality and how past borrowers rate their experiences. From the loan application process and loan disbursement to the ease of managing your account and making monthly payments, you’ll want a lender that prioritizes security, accuracy, and convenience.
You’ll also need to ensure that the lender offers the right loan amounts to match your needs. For example, if you need $100,000 and the lender only offers loans up to $25,000, it’s not going to be a good match no matter how low the APR is. Be sure to check that the loan offerings are a good match.
Repayment periods are also important to ensure that you can afford the loan payments and that you don’t overpay overall. Short-term loans can hike up your payments. On the other hand, if a term is too long, it can lower your payments but increase your overall cost. Be sure to find the right term to balance affordability monthly and overall.
Lastly, each lender will have its own eligibility requirements. Be sure to do some research into a lender’s criteria before applying. This can help to save you time by finding lenders that specialize in catering to your situation and creditworthiness.
Ready to find your low-cost small business financing? One of the easiest places to start your search is online with an alternative lender like Biz2Credit. You can apply within a few minutes, without hurting your credit score, and will find out within 24 hours how much you can borrow and what it will cost you. Then, if it sounds like the right loan option, you can have the money in your account within a few days. Free up operational cash flow, meet a range of business needs, and grow your business — all without the hassle.
