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Which Factors May Affect Credit Rates for Business Loans?

Business loan credit rates and personal loan credit rates operate under somewhat similar principles—the better your credit, the lower your interest rates, and the more money you may be able to borrow. However, a variety of other factors can impact your credit rate.

Size of Business

The size of your business can make a major impact on the credit rate which you are offered. However, understand that “size” doesn’t just mean the number of employees who work for you. It also may mean your overall business profile, including revenue, expenses, number of locations, and more. Typically, larger businesses are offered more money, but rates can fluctuate depending on the overall financial stability of your company.

National Interest Rates

Remember, it’s more than just your own individual business situation and finance that can impact credit rates. A variety of external factors that you have no control over can also make a difference, and this includes national interest rates. These are the rates set by the Federal Reserve. The interest rate set by the Federal Reserve then determines the rate of interest that the banks will lend money out at. Banks then pass those costs on to their consumers and businesses. It can be difficult, but if you can, try to time taking out your loan at a moment when interest rates are decreasing.

Funded vs Unfunded Rates

Funded business loans are loans in which the loan company actually provides the cash to the loan applicant. The loan applicant then uses that money in any number of ways, including working capital property, equipment acquisition, etc. Unfunded loans are better described as loan guarantees that are only paid out in the event that the company in question is unable to meet its financial obligation to other businesses. In this sense, they are more like “safety net” loans.

Each of these loans can have different rates, so make sure you investigate the difference before signing any paperwork, hopefully catching interest rates as they are decreasing. As part of this, make sure you understand how Current Expected Credit Losses (CECL) works. It’s advised that you should expect CECL credit losses 25-30 years into the future.

Your Personal Financials

Even if your business is a separate corporate entity, you should still expect that your personal financial situation will make an impact on your business loan credit rate. This is because your name, credit history, and management skills will ultimately impact the financial success or failure of your business. As such, your credit score and financial situation are considered somewhat of a proxy for your business’s creditworthiness.

The credit rates you get on a business loan can be affected by many factors, some of which you are in control of, and some of which you are not. However, it’s vitally important that you understand what these factors are in order to better prepare for the process of applying for a business loan. While there are many other factors, the above present four of the most common ones which you should monitor.

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