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How a business loan interest rate is determined

A business loan interest rate is set by a lending institution based on a number of different factors. Factors that go into setting a business loan rate are designed to help the lender assess how risky the investment of the money is. The riskier the loan, the more expensive it will be to borrow the money and the higher the business loan interest rate will be.

Some factors that lenders commonly consider when setting a business loan interest rate include:

  • The credit rating of the business. The higher the businesses credit rating, the more responsible with credit they appear to be to the lender and the lower the cost of borrowing money. A low credit score makes the business a greater risk and a higher interest rate will be charged.
  • The description of the business venture. Having a carefully crafted business plan in which it becomes clear to the lender exactly how they will make a profit is also very helpful in setting a business loan interest rate. The more likely it is the venture will be profitable, the more likely it is the lender will get its money back and the less the interest rate should be.
  • The amount of assets the business has. A business just starting up with no assets is a much greater risk to invest in or to lend money to than an established business.

Prevailing interest rates and the current credit market also play a role in the business loan interest rate. When the credit market is tight, interest rates across the board are higher, even for well-qualified businesses, simply because the landscape for lending money is riskier.

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