Understanding Small Business Loan Rates

Small business loan rates will vary depending on the type of loan. The loans are based on the financial stability of your business, the financial stability of the owners and even the business plan you have in place. Commercial loans are very different than personal loans because lenders will consider a variety of factors. 

Small Business Start-Up Loans

When you are first starting your business, your personal financial history is a top consideration for all lenders. The credit score for the owner of a company is also important. New business owners may be required to secure personal assets as collateral, such as homes or vehicles.

 Lenders will also consider the business plan and financial projections. A new business will need to show it will be legally incorporated, will have insurance, and will serve a niche in the business world in order to secure financing. Rates will be much higher for riskier businesses such as Internet companies and lower for businesses like medical or legal practices, which tend to be more stable. 

Small Business Expansion Loans

When a small business is expanding, the loan criteria will be mostly based on the business, and not the owners. Monthly profit and expense records should demonstrate the financial viability of the business.

A business will need to show that it can bring in additional profits. The loan will be given based on the proof that new profits will come after the business expands. The business may place its own assets on the line, such as equipment or property, in order to secure the loan.

Guaranteed Small Business Loans

Loans guaranteed by the Small Business Administration will have lower rates than loans that are not guaranteed by them. The Small Business Administration encourages the growth of small businesses through specific initiatives and loans. These may include minority business loans, which encourage those of racial minority and women to open new businesses. Other types of SBA loans include micro loans, disaster loans and special purpose loans. You can check the SBA's website to determine the financing you may qualify for: http://www.sba.gov.

Mezzanine and Subordinate Loans

Subordinate loans are unique forms of financing that usually come from hedge funds, mutual funds or other private investors. They have very high interest rates to compensate for the amount of risk associated with these loan products. They are generally unsecured, making them even more expensive.

Mezzanine loans are a common type of subordinate loan that provide investors with equity in the company in return for the financing. While these loans are expensive, they can significantly strengthen a company's financial profile and provide for rapid expansion.