Every lender has unique criteria to evaluate how much they will lend a business, if at all, based on the perceived ability to repay the loan. This is called underwriting. Different lenders have different risk appetites – but more risk comes with a higher interest rate. And if it’s not, it’s a good idea to check for hidden fees and charges. Your annual turnover will usually be the biggest factor determining the maximum loan amount. Higher monthly revenues will show business lenders that your business can sustain a larger loan.
The general financial health of your business will also affect this decision, and lenders will typically look at other factors. These include your credit score, any debts, business finances, other loans you have/had, your industry and the age of your business.
Your interest rate is calculated by considering multiple factors, but is predominantly affected by the risk of your loan. Most of business lenders use risk-based pricing, which allows lower-risk businesses to access lower interest rates and, usually, more principal. Other factors that influence your interest rate include your industry and the performance of your business. The kind of SME loan you take out also affects your interest rate. Usually, a secured loan will have a lower interest rate than an unsecured loan. You just need that big asset to guarantee it, which can be easier said than done when seeking a loan for business.
The loan term is the length of time you have to pay off your loan. Generally, if you need a quick cash injection and higher repayments aren’t a problem, a shorter term will have a lower total cost. But if you need lower repayments, you can get lower repayments by increasing the fixed term to make it more manageable for cash flow. While the repayments are lower, there are more of them so the total cost of your loan will be higher.
Different small business loans have different repayment frequencies – ranging from daily to monthly. In most cases, the more frequent the repayments, the more expensive the overall cost of the loan. It’s worth checking for any fees associated with repayments too, because a small repayment fee charged daily can significantly increase the total cost of your loan. If that fee is hidden, it can be a very nasty surprise. Small business loan repayments are usually repaid in equal instalments.
Moula averages the principal and interest repayment amounts over the loan term, so there are no surprises – just the same repayment amount debited every fortnight. No fees, no surprises, no worries.
Remember insidious ATM fees? Small business loan fees are much more confusing, and there can be many more of them. Many lenders use fees and miscellaneous charges to maximise their profits from your loan. While one loan may boast a lower interest rate, the hidden fees and charges could mean it will end up costing considerably more than a fee-free business loan with a slightly higher interest rate. Some banks offer variable-rate loans, so you could end up paying more interest if the rate increases.