Understanding Your Business Loan: A Guide on Interest Rates, Fees and Repayment Terms

As an entrepreneur, securing a small business loan can be a great way to finance growth and achieve your goals.

Before you sign on the dotted line, however, it's important to understand the terms of your loan, including repayment terms, interest rates, fees, and more. 

In this article, we'll explore the key factors every entrepreneur should consider before taking out a business loan. By understanding these factors, you can make an informed decision about whether a loan is right for your business and choose the loan with the best terms for your needs. 

Please note: This is not a comprehensive checklist. Consult a finance professional before taking out any loan.

Interest Rates

The interest rate is the cost of borrowing money, expressed as a percentage of the total loan amount. Interest rates can be fixed or variable, and they can vary depending on the lender and the type of loan. As a borrower, you should understand how your interest rate is calculated and whether it's fixed or variable.

Fees

In addition to interest, lenders may charge fees such as origination fees, application fees, or prepayment penalties. These fees can add up quickly and significantly impact the total cost of your loan. Be sure to understand what fees you'll be charged and factor them into your calculations.

Repayment Terms

Repayment terms refer to the length of time you have to repay the loan, as well as the frequency of payments. Longer loan terms typically mean lower monthly payments but higher total interest costs, while shorter loan terms mean higher monthly payments but lower total interest costs. Be sure to consider how the repayment terms will impact your cash flow.

Collateral

Some loans require collateral, which is a valuable asset that the lender can seize if you fail to repay the loan. Collateral can include property, equipment, or inventory. If you're using collateral to secure the loan, make sure you understand the risks associated with this arrangement.

Early Repayment Penalties

Some loans may charge a penalty if you repay the loan early. This penalty is typically a percentage of the outstanding loan balance and can be costly. Be sure to understand whether your loan has an early repayment penalty and factor it into your decision-making process.

Credit Requirements

Lenders use credit scores and other financial metrics to determine whether you're a good candidate for a loan. Before applying for a loan, check your credit score and understand what factors impact your score. If your credit score is low, consider taking steps to improve it before applying for a loan.

Type of Loan

There are many types of business loans, each with its own set of requirements and terms. Be sure to choose the loan — and loan amount — that best fits your needs and financial situation. Here’s a helpful article on how to choose the right business loan for your venture.

By understanding these key factors, you can make an informed decision about whether a loan is right for your business and choose the loan with the best terms for your needs.

If you have more questions, reach out to us. Contact AltCap today if you’d like to learn more.