Understanding Low Interest Business Loans

The secret to funding your business is to find a loan with a low interest rate. The difference in APR can save you a lot of money over time.

Jeff Salway Published on 08 April 2021.
Understanding Low Interest Business Loans

Being able to secure a loan can make a big difference to a business and may even be the lifeline that keeps it going.

So it’s important to know what to do to get the funding you need, whether you’re starting out, going through a difficult period or simply seeking to grow.

Getting a competitive deal is key, especially if margins are tight. It may not always look like there’s much difference between the interest rates charged, but even a slightly lower rate can save you a lot of money over time.

What are business loan interest rates?

The business loan interest rate is the level of interest you’ll need to pay back on top of the amount you borrow.

The amount you’ll see advertised when you search for a loan will be the APR (annual percentage rate), which includes the interest rate as well as the other standard charges you’ll have to pay.

For example, say you take out a five-year business loan of £100,000 with an APR of 7%. This means that you’ll be repaying £18,199 in interest (and fees if applicable) as well as the £100,000 you borrowed, at monthly repayments of £1,970.

Lenders charge interest in order to make it worth their while lending you the money, although other fees can be added on top, for example, arrangement fees or early repayment charges. Find out more about business loan interest rates and how they work.

What is a low interest business loan?

Interest rates are charged on all business loans, but it’s important to shop around, because it’s a competitive market in which some lenders charge lower interest rates than others. A low interest rate business loan can help keep your repayments down, especially if you’re borrowing a significant amount of money.

There are several ways you can try to keep the interest on your loan as low as possible.

Tips for getting a low interest rate

  • Don’t borrow more than you need. The less you borrow, the lower the total repayment. Sharpen up your business plan.
  • The more detailed and accurate your plan – especially the financial aspect such as your forecasts – the better the chance of getting your loan approved and securing a lower rate.
  • Have a purpose. With some types of loan you’ll be asked to explain what you need the money for and how you’ll use it. This can help influence the lender’s borrowing decision and the rate they charge you.

How can I check my business credit rating to improve my chances of a lower interest rate?

The interest rate on your loan will depend partly on how risky the lender considers you to be.

Lenders use credit records to assess how risky you are, as these give them information on your repayment history, how much credit you’ve applied for previously and any loans you’ve defaulted on.

If you’re a relatively new business they’ll likely look closely at the personal credit histories of all the directors when assessing your application.

So before you apply for a loan, make sure your personal credit record is up-to-date and as clean as possible. This includes making sure all your repayments are on time and looking for any errors, even if it’s just spelling mistakes in addresses.

You can request a free copy of your credit report from the main credit agencies, such as Equifax and Experian. You can challenge information that you think is inaccurate and ask for mistakes to be corrected, which they are obliged to do within 28 days.

» COMPARE: Your Guide to Business Credit Scores

How can I compare business loan rates?

It’s quick and easy to compare business loans. You can search by features such as the length of the term you’re looking for, the type of loan, the amount you want to borrow and the APR.

» COMPARE: Business Loans

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About the author:

Jeff is a freelance journalist who writes across finance & business. He was the personal finance editor at The Scotsman & Scotland on Sunday & a member of the Financial Services Consumer Panel. Read more

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