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Top tips to secure a better business loan interest rate

Are you looking to apply for a business loan? And are you wondering how much the interest rate will be and how you can get a competitive offer? Well, these are very commonly asked questions from our small business clients and the answer is that the interest rate for business loans varies. 

The interest rate varies depending on a few different factors including your business’s situation, your application regarding the loan amount and term, as well as the lender’s individual offering. 

First, let’s look at some fundamental information about business loan interest rates. 

What is the interest rate you’re paying on your business loan? 

A business loan interest rate is a certain percentage of your loan amount that you agree to pay on top of the amount that you are borrowing.

So, the total cost of a business loan usually consists of three main elements:

  • The principal: The loan amount you borrow, which can make approximately 75% of your total loan cost. 
  • The interest rate: A percentage of the loan that you pay for borrowing the money. The interest rates vary but can make up to approximately 25% of your total loan cost. 
  • Other fees: This varies from lender to lender but it can include fees such as an origination fee to start your loan for example. This can be approximately 2.5% of your total loan cost. 

What is the average interest rate for a business loan?

It’s important to distinguish between secured and unsecured business loans as different interest rates apply. 

Secured business loans are term loans usually taken for a larger loan amount over a longer period of time, secured against collateral such as property. Because the loan term is longer and security has been provided, the lender can usually offer lower interest rates. However, the loan application for a secured business loan can be more complex. It is often lengthy and time consuming with weeks of waiting until you get an application outcome. 

Unsecured business loans, on the other hand, are for smaller loan amounts usually going up to $150,000 and don’t require any collateral for security. These loans usually run over a shorter period of time. They are also generally easier to apply for and have less requirements to meet. Business owners can apply for an unsecured loan online and get funding on the same business day. However, the easy and fast process can come at a higher cost. Usually unsecured loans have slightly higher interest rates but mainly because of the increased risk that’s associated with giving quick access to funding without having the security against it.

It’s best to research suitable lenders and reach out to them about your business’ unique circumstances and needs. At Lumi we’d be happy to discuss your situation and provide you with a competitive business loan offer. 

What is the difference between APR and Simple Interest?

Lenders can often refer to different types of interest rates, which can be confusing. The main difference lies in the way they are calculated.

The two main types are Annual Percentage Rate (APR) and Total Interest Percentage (TIP) also known as Simple Interest. 

Annual Percentage Rate (APR): 

When a lender quotes a business loan using an APR, it means that the interest rate is applied to your reducing loan balance over time. Because of the compounding effect, it can make it harder for the borrower to calculate the total interest they will pay for the loan. If your chosen lender calculates interest using APR, make sure that you request a quote including a full repayment schedule that shows the total cost of the loan before you apply. 

Total Interest Percentage (TIP) aka Simple Interest: 

Simple Interest is a fixed percentage of the total loan amount you borrow. It certainly makes it easier for the borrower to calculate the total cost of a loan as you can simply add the total interest percentage of the money borrowed on top of the loan amount. 

The truth is that no matter whether you prefer to calculate the interest using APR or Simple Interest, you can always convert it into the other interest rate type if you know how to calculate it. This can help you make a more informed decision about whether the interest rate offered by the lender is competitive or not. 

Interest Rate Converter

Simply put, any interest rate can be converted into either Simple Interest or APR but the percentage is going to be different. To make it easier for you to calculate your total interest charges, use the rate converter table below for guidance. Note that the numbers below are examples only and the conversion may vary from lender to lender. 

Rate Converter
TIP on a 12 month term 9% – 12% 12% – 16% 16% – 24%
APR (approx.)  17% – 23%  23% – 30% 30% – 44%

For example, let’s say you want to borrow $50,000 (p) over one year (t). The lender offers you an interest rate of 12% TIP (r). Based on this information you can calculate the total interest charges and cost of your loan via the formula below: 

Total Accrued Amount (Principal + Interest) = P(1 + r*t)

TAA = $50,000 (1 + 0.12*1) 

TAA = $56,000

The total amount accrued, principal plus interest, from TIP/ Simple Interest on a principal of $50,000 at a rate of 12% per year for 1 year is $56,000. Therefore your total interest charges on those loan terms would be $6,000. 

Now, if you wanted to compare this to APR you would need to work with an approximate 23% interest rate to get similar interest charges. If you’re not a math fan, you can crunch the numbers to compare loan offers using handy online calculators as a reference guide. Make sure to always check your calculations against the actual quote of the loan. 

If you want to secure a better business loan interest rate make sure to:

  • Do your research. Find out what interest rates lenders offer and how they calculate interest rates. APR vs. Simple Interest. Make the conversions where necessary. 
  • Get a quote from your chosen lender and follow up with any questions you might have regarding the loan repayments and interest charges. 
  • If the lender calculates the interest in APR, confirm the Simple Interest equivalent, so you can better compare prices with other lenders. 
  • Finally compare prices from various lenders and make a decision about which lender is the best option for your business. Bear in mind that interest is not the only cost. Make sure you understand all fees and charges associated with your business loan and choose a lender who’s completely transparent with their pricing. 

At Lumi we offer fuss-free small business loans, up to $150,000 unsecured. Reach out to our friendly team to discuss your options and get a compelling loan offer. Our online business loan application process can be completed in less than 5 minutes and you’ll receive an outcome within 2 business hours. Funding on the same business day is also possible.

For any questions regarding your business loan application, get in touch via support@lumi.com.au or give us a call on 1300 00 5864.

Your Lumi team 

Post Author: Vanessa Muller

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