Loans are the lifeblood of small businesses, allowing them to maintain operations and finance future growth. For companies with low profitability, loan financing can mean the difference between bankruptcy and healthy operations. Loan interest rates vary based on credit, revenue and profitability. Fundamentally, banks rely on the market rate to give them guidance on the rates they offer for loans.
Average Loan Rate
The loan rate for small businesses is based on the market rate for loans and is fundamentally related to the long-term federal borrowing rate. In early 2011, this long-term rate was at a low of about 4 per cent, versus a 7.5 per cent historical average. Due to the riskiness of small business loans, their rate is always several points above the long-term rate. According to the Federal Reserve, the average in early 2011 for small business loans was 8.4 per cent for loans less than £65,000 and 7.6 per cent for loans between £65,000 and £0.6 million.
SBA Guaranteed Loans
The federal government's Small Business Administration has a program to guarantee loans for small businesses that may be considered too high-risk for banks. SBA loans are 3 to 4 percentage points above the prime federal funds rate, depending on the size of the loan and riskiness of the business. This rate is quite competitive with the market. SBA loans are offered to manufacturers, agriculture, seasonal businesses, professional service firms and a number of other categories.
Ex-Im Bank Loans
If your business exports your product to other countries, you are eligible for loans from the Export-Import Bank, known as the Ex-Im Bank. The bank's guaranteed loans' weighted average was about 6.4 per cent according to a recent report. This federally sponsored bank offers low-interest loans to entrepreneurs and large corporations alike; it is especially eager to finance clean energy companies. The bank is also keen to finance deals selling to major export markets including Mexico, Brazil, China and India.
Other Financing Options
If you are unable to obtain a loan through a traditional bank, the SBA or the Ex-Im program, there are still other options to pursue. Small businesses that are just opening usually rely on friends and family for initial funding. These contacts will almost always offer the most friendly rates in relation to the market. There are also cash advance companies and some online peer-to-peer funding sources that will require very high interest rates. However, it is safest to pursue traditional sources first.