5 Factors that Contribute to Fluctuating Interest Rates on Business Loans

Interest rates on business loans are determined by a combination of complicated factors, both on a personal level and on a national level. Your business's financial plan matters, but your business does not exist in a bubble. The national loan market will have a large affect on your ability to get loans and your loan rate.

1 - The National Prime Interest Rate

The national prime interest rate is set by the Federal Reserve in an effort to stabilize the economy and promote growth. During a recession, the Fed encourages borrowing by setting the rate very low. This means banks will not be charged much to borrow from the Fed or from each other. When the prime rate is low, interest rates on commercial loans will be pushed a bit lower as well. 

2 - Business Loan Incentives

During a slow economy, the federal government may introduce incentives to promote business growth and job development. This may mean the government provides more direct loans. In most cases, the government will offer to guarantee a higher number of loans with lower qualifications. When the government guarantees a loan, it tells a private lender it will purchase the loan if you default. This will reduce your interest rate because the loan is less risky for the lender.

3 - The Economic Climate

Risk-averse economies lead to higher interest rates. An economy starts turning away from risk when risk stops paying off. This usually happens in a recession. When the economy shrinks, those businesses and people who made risky loans or investments lose money instead of reporting gains. They become much wearier of potential future losses. To protect against loss, lenders will start to raise interest rates. This factor works against lower prime rates and government incentives to often push rates up, even in a bad economy.

4 - Your Business Model

Even if the economic climate is risk-averse, you may get a good rate on your loan with the right business model. First, the government will often promote loans to businesses that are promising job growth or a contribution to the local tax base. Additionally, the government may offer incentives to minority business owners. If your business model is promising to generate more jobs, contribute funds to local taxes and diversify the market of business owners in your area, you may get a good loan even if your venture is risky.

5 - Your Personal Credit

When you start a business, your personal credit will affect your loan terms. When your business has been around for awhile, it should have its own credit record to stand by. In either case, your balance sheet will affect your loan terms. Even on a commercial loan where a business model is additionally being considered, you cannot escape the affect of credit on a loan rate. The same is true on government funded or guaranteed loans. You will have to show you are creditworthy in order to be eligible for any loan program, whether it is public or private.