Business Loan Rates

By: EconomyWatch Content   Date: 23 December 2009

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Business loan rates describe the amount of interest charged to borrowers when they take on a loan. The rates of interest for these loans usually depend on the prime rate, credit worthiness of the borrower and the loan amount.

Business Loan Rates: Influencing Factors

Some of the main factors that influence business loan rates are:

·        National Prime Interest Rate: The prime interest rate is set by the Fed to stabilize the economy and promote growth. When the prime rate is low, interest rates on commercial loans are low as well.

·        Business Loan Incentives: During an uncertain economy, the Fed generally introduces loan incentives to promote business and increase employment growth. When the Fed guarantees a loan, it tells the lender that it will purchase the loan if you default. This reduces their risk considerably.

·        State of the Economy: When the economy shrinks, investments also shrink. To protect against this loss, lenders and financial institutions usually raise interest rates.

·        Your Business Model: You may land a low rate of interest if your business model promises to create more jobs or contribute to the local taxes. Additionally, the Government may offer incentives to minority or women business owners, if you fall into these brackets.

·        Your Credit History: You have to demonstrate that you are creditworthy, which can positively impact your interest rate.

Business Loan Rates: How Banks Establish Rates

When banks quote an interest rate to small business owners to you, they use the prime interest rate as a benchmark to calculate the rate. This rate is based on the loan rate of at least 75%of the country’s Top 30 banks.

 

Another deciding factor is the London Interbank Offered Rate (LIBOR). If you business has an international scope, LIBOR is important for you. LIBOR is the interest rate for the London Eurodollar loan market. LIBOR is usually synched with the prime rate.

 

Although most banks and lending institutions use the prime rate to define their business loan interest rate, you have to pay an Annual Percentage Rate (APR), which takes the compounded interest into effect.


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