The rate on a Lewisburg, TN business loan offer reflects how a funding partner reads the risk: credit history, time in business, collateral, the term and the amount. The rate is only part of the cost, though. Fees and the number of payments decide what the loan costs in dollars, so offers are fairly compared on their total.
Credit history, time in business, collateral, term and amount shape the rate a partner offers. Fees and the term shape the total cost. Two offers compare fairly only on the same amount and term, by total cost.
Credit history and time in business
A funding partner prices the chance that payments stop. The owner's personal credit history and the business's own payment record are the first evidence of that: on-time payments, how much available credit is in use, and any past defaults. Time in business adds a second view, since a company that has traded through several years of ups and downs has a record to show.
Neither factor is fixed. Paying every account on time, keeping card balances low and keeping business and personal spending in separate accounts can all help in the next review.
In a small business, a partner may read the owner's credit and the company's side by side. In 2023 ZIP Code Business Patterns data, 50.1% of the 429 employer establishments at a ZIP 37091 address were below five employees.
Collateral, term length and loan size
Three features of the request itself move the rate:
- collateral: a loan secured by equipment or receivables gives the partner something to recover, and the price may reflect that
- term: a longer term spreads payments but keeps money out longer, and adds interest even at the same rate
- size: fixed costs of arranging a loan weigh more on a small one
Illustration only, invented figures: a $500 fee on a $10,000 loan is 5% of the amount; in this example the same fee on a $100,000 loan is 0.5%.
A business term loan and a business line of credit are priced differently, too: a line charges interest only on what is drawn, and may carry a yearly or draw fee instead.
Fees and total cost beyond the rate
Two numbers describe an offer: the rate and the total cost. The second one includes:
- an origination fee, which may be taken out of the amount paid to the business
- documentation or closing fees
- prepayment terms: a charge for paying early, or interest counted in a way that leaves little to save
- late fees and any fee for an unused credit line
Illustration only, invented figures: a business holds two quotes, each for $50,000 to be repaid over 48 months. Offer A has an 11% annual rate and a $1,500 origination fee taken from the proceeds; Offer B has a 12.25% annual rate and no fee.
| Offer A | Offer B | |
|---|---|---|
| Annual rate | 11% | 12.25% |
| Fee at closing | $1,500 | $0 |
| Cash received | $48,500 | $50,000 |
| Monthly payment | $1,292.28 | $1,322.84 |
| Total cost (interest plus fee) | $13,529.44 | $13,496.32 |
In this example the lower rate is not the cheaper loan: Offer B costs $33.12 less in total and puts $1,500 more cash in the account.
Comparing offers on the same terms
Offers line up only when they describe the same amount over the same term. Before comparing, ask each partner for the cash received, the payment, the number of payments, every fee and the total of payments. Then compare the total cost, not the headline rate.
Check whether each rate is fixed or variable as well. A fixed rate holds for the whole term. A variable rate is tied to an index and can move, so the payment in month 30 may differ from the first one. When one offer is fixed and the other variable, work out the variable one at its starting rate and again at a higher one.
A merchant cash advance does not fit this comparison as a loan, because it is not one. The provider buys a share of future card sales and states a total amount collected, with no annual rate. The fair check there is that total against the advance received, and the share of each day's card sales it takes.
The business loans page sets the funding types side by side, and the repayment calculator works out the payment for any amount, rate and term.
By Sabledale Business Loans · Updated
