Are interest rates going up for small business loans?

By: Flex Capital

As you are probably aware, interest rates have been on the rise for the past couples years overall. Although we don’t see any end in sight this is actually a sign the economy is doing quite well. The Federal Reserve tends to increase rates during times of growth and then pull back when the economy starts going down.

Another aspect contributing to higher interest rates is to keep a handle on inflation. Ultimately these increased rates will have an impact on the rates of typical business loan. Although rates have not reached their peak, they’re definitely higher than last year. However, the bottom line to consider is the fact that interest rates are being hiked up because the economy is booming and there’s less risk in the market all around. Lenders believe you can not only handle it but continue to thrive with higher-than-normal payback amounts.

How can I utilize funding without getting nailed with too much interest?

A great way to avoid those high interest payments is to go with a short-term option. This means you’ll make less payments and pay less interest. If you can utilize the funds quickly, get the return on investment, and pay it back quickly, then there’s no reason to keep the loan for longer than that.

In fact most lenders will prefer the shorter length of the loan since it eliminates much of the risk. Banks take a great risk lending to businesses that may or may not survive. If a company defaults due to inability to pay, it is unlikely that the unsecured debt will be recovered at full value. Therefore, loans for small businesses tend to be higher rates than average.

Typically, the only companies getting huge funding amounts and “good” interest rates are businesses who do not need the funds. They have plenty of cash flow and cash on hand to keep expanding, these are the companies banks are most willing to work with.

However, there are programs available for the average business, you just need to utilize them properly and make sure you work with a lender you can trust. There are many lending institutions out there trying to take advantage of the fact it’s difficult for most businesses to get a loan today. Therefore, they make the rate almost astronomical, and the regulations on the financial industry in dealing business to business are a lot less strict than direct to consumer. So, there’s plenty of room to be taken advantage of in terms of rate.

How do I avoid working with the wrong lender?

Most importantly is that you get a few quotes and pick the best terms from there. If you get say 3 lenders in the same ballpark numbers wise then it’s likely those are your best options.

Always read the full contract before signing. A lot of lenders bury the exact terms in a very lengthy contract. Only work with a lender willing to spell it out for you and give you those exact numbers up front.

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