When securing a business loan, one of the most important factors to consider is the interest rate. It directly impacts your repayment costs and the overall affordability of the loan. Lenders assess financial health, industry risks, and economic trends to set rates. Therefore, understanding these factors can help you secure better financing terms.
Bank of England Base Rate
The Bank of England Base Rate heavily influences borrowing costs across the UK and is used as a means to control growth and inflation within the economy. When rates go up or down, it leads to the rest of the economy to follow. Banks will vary their rates to be competitive, but the general rule is that they follow suit of the Bank of England Base Rate.
Loan Type
The type of loan you choose has a significant impact on the interest rate – secured, unsecured or government-backed are all different. Secured loans are often a lower interest rate due to the reduced risk for lenders, and unsecured loans are usually higher risk for lenders, therefor come with a higher interest rate.
Creditworthiness
Usually, personal credit of the business director is a high consideration for lenders, and if a director has defaulted on previous loans, has high levels of personal debt or bankruptcy, this is likely to increase the interest rate offered. In addition to this, the business credit rating is referred to when making an offer. Missed payments, a short trading history or late payments will likely make your credit score lower and interest rate higher.
Loan Term
The repayment term can be an important factor when it comes to interest rate. Longer terms may be offered with a lower annual interest rate. On the other hand, shorter term business loans often have a higher interest rate, but as it is repaid over a shorter amount of time, the total amount repaid may add up to a lower amount overall.
Affordability
A finance agreement usually results in monthly repayments, so lenders will compare that figure to your bank statements and decide whether if it is affordable for you to make those repayments. They will look into whether your cashflow is predictable, consistent and if you have good financial management. Being a homeowner can also work favourably, as it provides the best security for a lender as it rarely loses value long term. This is often in the form of a ‘Personal Guarantee’ and is likely to secure better rates, especially if a lot of the mortgage is paid off.
Fixed VS Variable Interest Rates for Business Loans
When choosing a loan, you will often need to decide if you would like a fixed or variable interest rate:
Fixed Rate: A set interest rate for a specific period of time, meaning you will pay the same rate each month, regardless of changes in market interest rates.
✔ Stability: Your repayments remain consistent, making budgeting easier
✔ Slightly Higher Rates: Fixed rates tend to be slightly higher as they offer certainty
✔ Best For: Businesses with tight cash flow or those seeking predictable payments
Variable Rate: An interest rate that can fluctuate up or down over time, it is often linked to a benchmark such as the Bank of England Base Rate.
✔ Fluctuation: Rates change with the market, which can lead to higher costs when rates rise but also lower rates when the rates drop
✔ Riskier Option: Variable rates are suitable for businesses who are able to deal will the uncertainty of fluctuating costs
Strategies to Securing Favourable Rates
Improve Your Credit Score
Work on maintaining a strong credit score both in your personal and business accounts. Pay bills on time, reduce debt and monitor your credit report for errors. A higher credit score can help you to qualify for lower interest rates.
Shop Around
The business loan market is highly competitive, and rates vary from lender to lender. Using a finance broker such as Moorgate Finance can help you to find the best deal – our expert team know the requirements inside out and can also obtain favourable rates on our lending panel.
Opt for Secured Loans
If you are able to offer collateral, such as property or equipment, for a secured loan- they typically come with more favourable rates.
Demonstrate Business Stability
Lenders are more likely to offer competitive interest rates to businesses that are able to show strong cash flow, turnover and a clear growth plan.
Every business is different, so it is essential to tailor the right loan to your specific circumstances. The team at Moorgate Finance are experts in ensuring you get the right financial solution for your business.
Get in touch here to see how we can help your business, no matter what phase you are in.
