Interest rates have been a lone bright spot this past year amidst the chaotic economic downturn stemming from the coronavirus. For small businesses, the government’s intervention to offset the effects of COVID through special programs has been essential to keep them afloat.
Government initiatives in forgivable PPP loans have sustained many businesses as productivity and consumer spending dropped to crippling lows. Another large contributor to retaining solvency was historically low interest rates, which bottomed out at 2.65 percent in January, 2021.
As the economy slowly returns to normal through a concerted recovery effort, many of the pains felt by small businesses should diminish. Like mortgage rates, however, small business loans and government support will certainly adjust as the market recovers.
The window for small business owners to take advantage of special financing options is closing. Understanding the factors contributing to the coming rate hike and available financing options can help small business owners get the best rates to accomplish short and long-term goals while retaining the lowest cost of available capital.
Why Interest Rates Change
Low interest rates help individuals and businesses borrow and spend more readily. Due to the pandemic, economic fears have pushed interest rates to historically low levels in an effort to maintain consumer activity.
There are two significant factors that impact the cost of money to businesses. First, what we’ve been talking about is the federal interest rate, or the rate at which the government loans money to financial institutions. Second, the banks moderate their risk by assessing the risk that individuals and businesses seeking financing will fail to repay. The rate your business receives is a combination of the federal rate and the lender’s assessment of risk. Short term loans are riskier than long term loans. Unsecured lines of credit are riskier than asset based borrowing. A business that has low solvency is a higher risk than one with high sales velocity and strong margins.
As the economy strengthens, demand will impact interest rates. As business owners become more willing and able to spend, federal interest rates will go up. How much? That is a current unknown, as is the final impact on your access to business capital.
The characteristics of the individual loan are also influential in determining the actual interest rates. These can include the loan’s size, type and term length as well as the borrower’s credit history.
Small Business Loan Options
PPP loans have been a lifeline for many businesses in keeping their employees paid through the crisis. The current PPP plan is taking new applications until May 31.
The government initiatives to ease the burden on small business owners are not the only avenue for relief. Lenders have adjusted traditional loan offerings to make borrowing easier and more affordable. Pursuing a small business loan with a sense of urgency in the current climate can potentially mean hundreds of dollars worth of monthly savings for informed borrowers.
Choosing the right loan requires more than just comparing interest rates. The loan type, the use of the loan and eligibility requirements are just some of the additional factors that can affect the best lending option. We will cover popular small business loan types and when they would be ideal to pursue.
Bridge
Bridge loans are short-term loans that generally do not exceed a 12-month term. When businesses are between long-term loans, bridge loans can inject them with capital to make necessary, urgent purchases.
Bridge loans are favorable for business owners who need cash quickly or do not have the credit requirements to secure long-term financing. Lenders who offer quick turnaround and an easy application and approval process optimize the advantages of these loans.
The downside to bridge loans comes in the interest rates. Along with variable origination and account setup fees, interest rates normally fall between 15-24 percent APR. Comparing initial fees and credit requirements are crucial to consider because of how they can affect your overall payment.
Commercial Real Estate
For businesses looking to enhance their space, commercial real estate loans are popular long-term solutions. These loans often reflect residential real estate lengths of 30 years or more.
Unlike bridge loans, sensible commercial real estate loans require more time and documentation for approval. Qualification is usually reserved for borrowers with healthy credit scores. Less qualified buyers will either face higher interest rates or increase down payment requirements.
Loans supplied through the government like SBA or USDA loans offer the most competitive rates, with SBA 504 loans as low at 2.231 percent in 2021. If you have good credit and are looking to purchase a property for commercial use and not an investment property, government-funded loan programs like these are worth investigating.
Equipment Loans
For businesses looking to add, repair or update equipment, equipment loans can offer a great combination of term and interest rate. Unlike equipment leasing, loans carry an initial down payment, normally around 20 percent, but you own the equipment from the outset.
Equipment loans are best for owners with exceptional credit, but shopping around can yield intriguing opportunities for startups and those with less-than-stellar scores. In this circumstance, your independent loan broker can often match you with the right loan and terms by working a network of lenders far more broad than a supplier’s financing or your local bank.
Rates start around three percent for equipment loans and range from six months to several years. Budget-friendly SBA 7(a) and 504 loans, which carry special rates for those with fair to high credit scores, can last up to 10 years.
Revolving credit
Revolving credit has been popular for businesses feeling the financial stress of COVID. In a business sense, it is best used for short-term spending. A revolving credit line has a financial limit available at all times to use on any business expenditure.
Credit lines give you immediate flexibility in how much you can borrow within a limit. There are also few penalties for early payoff. If you make a purchase for a specific financing term, you can pay it off at the first bill or pay it off over time at a low monthly rate.
Changing market rates may be a downside to these lines in the future. Variable interest is common with revolving credit lines, so increases in your interest rate may be foreseeable as we progress through the current growth cycle.
Now is the time to start finding opportunities in a borrower-friendly lending market. Talk with your broker today about the next stage of growth for your business to discover the best small business loan options. No matter your financial situation or business goals, we will help pair you with the right loans at the right terms to build your success.
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