How to Secure a Low-Interest Business Loan

It’s important to know your options because there are many kinds of low-interest business loans and they’re suited to different types of borrowers. It’s equally important to understand how to improve your financial situation so you can qualify for lower interest rates. In this blog post, we’ll help you understand everything you need to know about securing low-interest business loans. First, we’ll walk through where you should focus on improving your business finances. Then, we’ll review several types of business loans that have low interest rates and their qualification criteria.

How to Qualify for Lower Interest Rates

The way that financial institutions set business loan rates for business owners is similar to how insurance companies set life insurance premiums. With life insurance, the premium you pay depends on your physical health and family history. With loans, the interest rate you pay depends mainly on your business’s financial health and history. The factors that business loan lenders typically review in order to determine your interest rate are:

Time in Business

Annual Revenue

Credit Score

Debt to Income Ratio

With both insurance and business loans, the better your health, the lower your cost. Unfortunately, many borrowers mistakenly believe that there’s little they can do to improve their financial health. Because they believe this, these borrowers choose financing with lenient application criteria and accept that they have to pay higher interest rates. Don’t make this mistake when seeking a small business loan or other type of additional working capital. Here are the steps you can take to improve your ability to qualify for low interest rates.

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4 Tactics for Improving your Loan Application

1. Check your credit reports

Mistakes on your credit report happen, and they can negatively affect your business and personal credit scores. If you find an error, one of the fastest ways to improve your credit score is to fix it. Therefore, before you start the loan application process, pull a credit report. If you find any errors, get them fixed by disputing the errors with the bureau that made the error. For your business credit report, you’ll need to dispute the error with Dun & Bradstreet, Equifax or Experian. Do this for both your business credit and personal credit since both affect your loan applications.

2. Pay off debt or increase income

Along with your credit score, one of the first things that alternative financing lenders look at is how much debt you have. Evaluating your existing debt load enables lenders to determine if you can afford additional debt. All else being equal, the more debt you have, the less likely you’re able to secure a low-interest business loan. That’s why paying off debt, such as business credit card debt, can help you qualify for better term loans. That said, don’t look at your debt in isolation; they also compare it to your income using the debt-to-income (DTI) ratio. This ratio helps online lenders determine if you have enough income to cover current and future debt payments. So the more you can increase your income, the broader access you’ll have to low interest rates.

3. Keep old accounts open and limit new accounts

FICO scores are calculated using data in five categories, one of which is length of credit history. The higher the average age of your credit accounts, the better your FICO score will be. This is also true for other credit scoring models, including both personal and business credit. If you close an old account or open a new one you reduce the length of your credit history. As a result,  your credit score will be negatively impacted. So if you’re looking to improve your credit score, or at least not hurt it, avoid opening new accounts or closing old ones.

4. Keep credit utilization low

Another common data point used to calculate your credit score is your credit utilization ratio. This ratio is the amount of credit you’re using compared to the amount of credit you have available. Therefore, the higher the ratio, the worse it is for your credit score. There are two ways to reduce your credit utilization ratio: pay off your debt or increase your available credit. Paying off any credit, even before it’s due, will reduce how much credit you’re using and may help your score. Similarly, requesting a higher credit limit on your accounts can reduce your utilization ratio by increasing the amount of credit you have.

Types of Low-interest Business Loans

The business loans with the lowest interests are traditional bank loans, SBA loans, and commercial real estate loans.

Traditional bank loans

Business loans from a bank are among the hardest to qualify for. You’ll need (at least) an excellent credit score, years of business history, and strong financials. You will be rewarded, however, with relatively low interest rates. According to NerdWallet, bank business loans’ average interest rates range from 2.54 to 7.02 percent.

SBA loans

SBA loans also have low interest rates but are more accessible than traditional bank loans, at least in theory. To pass pre-screening for an SBA loan, you need a FICO Small Business Scoring Service (SBSS) of 155 or higher. Technically, however, there’s no minimum credit score for SBA loans. Even with a low SBSS score, your application may still be approved based on other criteria, though this is not common. In reality, because SBA loans are so competitive, you're much more likely to secure one if you have good credit.

Commercial Real Estate Loans

As the name suggests, commercial real estate loans can only be used for renovating or purchasing commercial property. Since these loans have built-in collateral—the real estate—your credit and financial history aren’t as important. In the event of a default, the business loan lender can limit their losses by foreclosing on your property. This also allows commercial real estate lenders to charge lower interest rates without the stringent criteria of a traditional bank loan. Although these loans are usually low-interest, they won't be flexible in terms of spend. Remember, you can only use this type of loan for commercial real estate. If you need financing for equipment, additional cash flow, or other expenses, you'll need to pursue a different loan type.

Conclusion: Always Consider Overall Loan Cost

It’s easy to get tunnel vision and focus exclusively on finding the lowest interest rate. However, the cost of your small business loan doesn’t just depend on your interest rates. The loan amount, term length, and fees significantly impact your overall cost. Broadly speaking, lower interest rates equate to more affordable loans, but not always. Therefore, as you put the strategies above into action, always keep total cost in mind. Although you may require additional funding to invest in your small business, taking out a loan that you can't afford could cause your business further financial strain