Business loan interest: the differences
What is a fair interest rate on a business loan? That question is not that easy. Because even though at first glance the business loan with the lowest interest rate seems to be the best offer, it doesn’t have to be that way!
The interest on a business loan is important. Both for the applicant, who calculates whether he can repay the interest, and the lender who calculates whether there is sufficient return against his risk. But if nobody wants to pay too much, why does the interest rate on a business loan differ so much per provider? And what is actually good interest?
Average interest is not too bad, but are you eligible?
An average interest rate for business loans does not really exist. In addition, it is highly questionable whether you are eligible for this. Banks such as ABN Amro, Rabobank or ING, for example, finance an enormous amount of large companies at very low interest rates. But because they have been customers for years, or offer a lot of collateral, the banks there run a relatively small risk.
Within SMEs, interest rates are often considerably higher than those offered to large companies. In addition, the interest rate on a bank business loan may be low, but that also makes this credit inflexible. Because the margins are so low, the bank’s control is fairly intensive. It can take a long time before you know whether you will receive the loan and that chance is relatively small. A large part of the credit applications from banks is rejected.
Many factors influence the interest rate of a business loan
Alternative funders partly fill this gap, but the differences there are very large. There are many differences between factoring, working capital, or regular corporate financing. The type of loan (annuitary, linear or interest-only?) And the collateral also have a lot of influence. In addition, income and expenditure in recent months often have a lot of influence. An export from the bank account of the last months is usually requested for this.
There are no legal rules for the interest rates of business loans. They therefore want to get along in all directions. Where consumers often see only small differences behind the decimal point, the differences in interest rates on a business loan can be double-digit. Even with new entrants who seem to work similarly, the differences can be large. Yet that is not always unjustified.
There are big differences in business loans
To start with, it pays to compare. For example, the new fintech company Funding Circle is currently advertising with interest rates of 3.79%. But for the whole of 2018, the average interest rate of all business loans granted is around twelve percent. That is more than three times as high as what they advertise themselves with!
New10, an apparently comparable provider, offers business loans with interest rates from 2.7 to 8.9% per year. New10 is part of ABN Amro that has established the interest rates. The maximum there is therefore far below the Funding Circle average and the average will perhaps be half as low.
At first glance, New10 seems to be a better provider. But that doesn’t have to be because this provider is selective. To start with, you must have a minimum turnover of 100,000 euros per year, have a positive equity and you must be profitable. In addition, you pledge your assets with New10, which makes it harder to take out future loans. Furthermore, New10 does not currently finance companies in the financial services, shipping or agriculture sectors.
Higher interest rates sometimes offer more options
A business loan with Funding Circle is already possible with a turnover of 30,000 euros, making it accessible for many self-employed people and small one-man businesses. In addition, you do not have to pledge any assets here, although you are always jointly and severally liable for your loan.
Funding Circle also offers loans at a larger range in terms of interest rate. This larger range can make a loan considerably more expensive, but if a slightly higher interest rate makes the difference between being accepted or not being accepted as a customer, you as an entrepreneur can at least continue.
Comparing pays off! But be aware of the risks
Comparing business accounts pays off!
The above two providers are just examples. There are dozens of other alternative funders active in the Netherlands. Each with its own interest rates and conditions. It is therefore worthwhile to make a good comparison, because an entrepreneur does not always have to be worse off with a higher interest rate.
For example, there are also financiers where you can temporarily borrow interest-only. Even if you sometimes pay slightly more interest, because you don’t have to pay off, the pressure on your liquidity is lower in the beginning. That does entail more risks. In the end you have to pay back of course. But if you invest in a new store or machine and your income has to get going, this may be your choice.
Investors sometimes expect hundreds of percent returns
Is it not the interest but the amount that is decisive for you? For example because you are a very fast-growing startup or scaleup? Do you want to expand internationally and grow faster than your cash flow can actually handle? In that case, investors are sometimes a possibility.
They sometimes charge interest, but much more often they want an interest in shares so that their return on a future sale becomes clear. You then pay no interest and sometimes nothing, but investors naturally expect something in return. If you sell your company within a few years, it may just be that investors expect that their investment has now increased tenfold!
That return cannot be achieved with any interest rate. For that reason, investors usually only come to the fore when no lender dares to provide a loan of the desired amount.