How to Reduce Interest on Your Business Loan in 2022
Loans are often a necessary evil for establishing a successful business – especially since few of us are loaded with enough cash to get a business off the ground on our own.
If you invested in your business by taking out a loan, and are currently struggling with high interest rates, I’ve got five simple strategies to make your loans feel more manageable.
I’ll also share a few good lender options that can help drive down your interest rates, so you can experience financial relief sooner rather than later.
5 Things You Can Do to Reduce Your Interest Rate
1. Give Your Credit Score a Boost
One easy way to position your business for reduced interest on loans is to increase your credit score.
Your credit score is often an indication of how much of a risk you are, or how dependable you will be in repaying what you owe. If you present your lender with a better credit score than you had previously, you increase your odds of reducing the interest on your business loan.
While boosting your score may seem “easier said than done” to you, it doesn’t have to be difficult or take months to achieve! Should you decide to focus on this goal, there are a few simple strategies you can employ to knock your score up several points. These include:
- Prompt and timely bill payment
- Diverse credit mix
- Proper use of credit (less than 10% utilization).
Timely bill payment is self-explanatory, but having a diverse credit mix (different credit cards used appropriately, loans that you actively pay off, etc.) and using less than 10% of your overall credit also ensure that your score stays strong.
In addition, it is a good idea to keep your personal expenses separate from your business expenses, so that one doesn’t impact the other. You wouldn’t want your personal credit history to negatively affect your business credit, and consequently your odds of securing lower interest rates.
2. Get a Business Line of Credit
Another strategy you might consider for reducing the interest on your business loan is getting a business line of credit. You can accomplish this through your bank, or through non-traditional means (e.g., e-commerce lending solutions).
Basically, a line of credit will allow you to put those funds toward your business loans, acting as a checking account for debt repayment. A revolving line of credit ensures that you don’t pay unnecessary interest on funds that you don’t urgently need, which could be a lifesaver when it comes to managing high interest rates.
3. Consider Refinancing Your Loan
While refinancing requires that you’ve been in business for a longer period of time, it is a good option to explore if you have a history of running a successful establishment, or if your business isn’t brand new. Refinancing could potentially mean lower monthly payments as well as a reduced interest rate.
There are three main avenues for you to choose from if you are considering the refinancing option. These include:
- Small Business Administration (SBA) loans
- Traditional bank loans
- Alternative business lenders
SBA loans are one of your best bets for successfully refinancing your business loan. The U.S. Small Business Administration partners with lenders to ensure small businesses have access to funds. This is also a good option for risky borrowers and enterprises.
While traditional bank loans may seem like the most obvious and straightforward choice, refinancing is fairly hard to accomplish through this avenue. This is because of the strict borrowing requirements that banks often employ.
Finally, alternative business lenders may be another solid choice for refinancing. The Community Financial Development Institutions (CDFI), for example, serve low-income communities and could allow refinancing for businesses that don’t meet traditional loan qualifications.
4. Establish a Personal Connection with Lenders
In many cases, you can make a personal connection with lenders – they are more than just faceless dollar signs that fund your business! If you were to make a deal with a family member or friend, it’s safe to say that you’d probably expect the terms of your loan to be good because of your connection to them. Lenders don’t have to be any different.
If at all possible, set up a time to meet with them and discuss business, the results you have produced (thanks to their investment), and anything else that may prove valuable to them. These days, online meetings may be your best and safest bet, and they can be just as effective as in-person meetings.
You should act professionally and be prepared during your meeting or video call – being prompt, well-dressed, and ready to answer any questions your lenders may have signals to them that you take your business, and their time, seriously. These things are important whether your meeting is virtual or not.
While this option isn’t a sure-fire way to reduce the interest on your business loans, it definitely can’t hurt!
5. Negotiate the Terms of Your Loan
This is an especially good option for businesses that have a proven record of success over an extended period of time. As a business owner, you will be in a better position to negotiate the terms of your loan if you can point to continuously strong results that your business has produced. The more profitable your business is, the better your odds are of securing a lower interest rate.
Steady – and preferably evolving – business success over time shows lenders that they can count on what you’ve built for repayment. This, in addition to consistently paying off your outstanding debt, signals to lenders that you are trustworthy enough for them to lower their interest rates.
The Best Lenders for Businesses
Now that I’ve covered some helpful tips for reducing the interest rates on your loans, let’s discuss a few lending options for your business!
- Small business loans
- Start-up business loans
- Short-term business loans
- Long-term business loans
- Business lines of credit
LendingTree describes itself as: “An online loan marketplace for various financial borrowing needs, including auto loans, small business loans, personal loans, credit cards, and more.” The company’s services are geared toward all types of businesses, from LLCs to sole proprietors, and it even offers loan comparison to ensure that business owners like you get the best deals.
To help reduce the interest on your business loans, LendingTree offers resources such as its Financial Goals feature, where you can pick the goal you want to work toward and the company will provide options for you. Such goals include buying a home, financing an expense, and refinancing a loan.
The LendingTree website also has a wealth of informational articles that can help guide you in securing lower interest rates.
Rapid Finance is an online finance solution for businesses looking to grow and expand. It offers funding in as little as a few hours, flexible and automatic payments, and financing that is tailored to your business.
One of the services that Rapid Finance provides is a line of credit for qualifying businesses. As I discussed earlier, lines of credit can be invaluable for lowering the interest rates on your business loans because they provide the direct funds for you to pay what you owe. Among many other services and features that Rapid Finance provides, this is one of the best tools for you to leverage through the company.
Biz2Credit is another online lending solution that prides itself on connecting business owners to funding as quickly as possible. It offers several different funding options depending on your business’s needs, from $25,000 worth of working capital to major loans of up to $6M for large projects and acquisitions.
The company’s website also features a helpful Knowledge Center, which offers financing how-tos by business type, industry, specialized business financing (e.g., for veterans, for Latino business owners, and for women), and lots of useful information on popular small business loans.
Biz2Credit offers interest rate information specifically for SBA loans, business lines of credit, and other comparable financing options. You can explore its Knowledge Center for more information on how to reduce the interest rate on your business loans.
The Bottom Line
Ultimately, if you are dealing with high interest rates on your business loans that feel unmanageable or – at worst – crippling, there are concrete actions you can take to drive down those rates to experience some much-needed relief.
If your business is doing well and yielding significant results, use that to your advantage and negotiate your rates with lenders. Establish a personal connection, and use it to showcase your business’s success. Boost your credit by ensuring you have a diverse credit portfolio, making payments on time, and not exceeding 10% of your line of credit each month. Finally, consider refinancing if you’ve been in business for an adequate amount of time. Doing so could mean lower payments all around!
Hopefully, the tips and strategies presented in this article will give you a great place to start as you begin taking steps to reduce the interest on your business loans. Show lenders that you’re the kind of individual worth trusting, and you’re sure to enjoy better interest rates over time.