Seven Ways to Reduce the Interest Rate on Your Small Business Loan

interest rate

Every business, from a small firm or a young entrepreneur to a large MNC needs loans periodically to utilise the influx to meet their working capital needs, tap new business opportunities or expand their business. A small business is particularly hard-pressed for funds, as it does not have abundant financial resources to rely on when in distress. It usually faces delays in invoice payments from large clients, which adversely affects its cash flow.

Unsecured small business loans interest rates are typically higher as compared to secured loans, as the lender is exposed to a significantly higher risk. This increases the operational costs for a small business, and therefore it should always look out for ways to reduce the SME loan interest rate. Moreover, while the amount of business loan and the tenure for which it is approved depends on the financial standing of the business, the small business loan interest rate is decided based on several additional factors. Let us examine a few ways that can help reduce the interest rate on your business loan:

  1. Maintain a Healthy Credit Score: This is the most important requirement to get a good deal on small business loan interest rate. In the event that you enjoy a healthy credit rating and have been repaying previous loans on time, the lenders will be inclined to offer the most favourable small business loans interest rates. Small businesses often need to apply for short-term loans, and therefore they should maintain a healthy credit score. Such a practice will not only help in getting the best small business loans interest rates for the current loan, but will also help in procuring favourable SME loan interest rate in the future.
  2. Highlight the Number of Years Your Business has been in Operation: A business that has been in operation for two years or more and has sound business receivables during that period should land a favourable small business loan interest rate. Such a business would also do well to maintain proper records of its business transactions during its entire operational history. This information can be used to strengthen its case further for getting the right deal on SME loan interest rate. A lender would want to be convinced about the business objectives and the growth trajectory of a business before providing business funding. Therefore, you need to present a clear business plan along with a proof of healthy business growth to secure the best deal on small business loans interest rates.
  3. Preserve Healthy Cash Flows: A robust business with healthy financials quarter-on-quarter is clearly preferred by lenders for granting business loans. Such a business can easily secure the best deal on small business loan interest rates as well. Always cut down on uneconomical expenditure and avoid taking business loans in excess of your actual requirement. Too many loans will strain your cash flow as well, and thereby compromise on your negotiating power while deciding SME loan interest rate
  4. Get Your Existing Loans Refinanced: In case your business is doing well and you have an old loan that was taken at a higher SME loan interest rate, you could look at getting it refinanced through an online FinTech company. Such lenders offer the most competitive small business loans interest rates, as they completely understand the business needs of different SMEs. In case of good business performance, they may even offer to refinance existing loans at competitive SME loan interest rate.
  5. Make Additional Repayment when You have Sufficient Funds: When your business is doing well and you have additional funds on hand, consider paying an additional instalment. This way you will be able to reduce your small business loan interest rate and improve your credit rating. Such a strategy will also enable you to negotiate from a position of strength while considering small business loans interest rates from lenders, and will keep a check on your operational costs as well.
  6. Make a Higher Down Payment Upfront: When taking a loan, it always pays to make the maximum down payment that you possibly can. Although this would reduce the principal amount that is considered for the SME loan interest rate, in the long run you will save on costs in serving small business loans interest rates. This will also help you repay the loan amount on time, and thus have a positive impact on your credit score. A better credit score will further translate into getting a better deal on small business loans interest rates in future.
  7. Have a Clear Business Growth Plan: You need to be clear about your business objectives and be able to demonstrate your business prospects to the lender in the best possible manner. They could be in the form of business receivables, your revenue achievement in the past and that expected in the near future or it could even be your tax filing history. A lender wants to be fully convinced about your repayment capability before disbursing a short term loan for your business need. If your business prospects appear sound, you can negotiate on getting the best deal on interest rates. The new age FinTech companies offer various types of financing option like home finance, car finance, two wheeler finance etc. They provide maximum flexibility and transparency in providing small business loans if you manage to strike a balance between your business necessities and your requirement of securing a good deal on small business loans interest rate.

Small businesses invariably need short-term loans for meeting urgent business requirements, and paying interest on the loan is a major operational cost. However, being prudent while choosing the business loan, and maintaining healthy business practices always helps in controlling costs through reduction in small business loans interest rates.

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