The Beginner’s Guide To Small Business Loan Rates And Fees

A small business loan for investment purposes differs from working loans. In this article, you will learn typical small business loan rates.

Most often, small business gets the following loans:

Loans for investment purposes

This type is a fairly large loan aimed at financing one of several possible goals.

The objectives of investment lending include:

  • Purchase of real estate or transport;
  • Repair of an existing property, modernization or technical re-equipment;
  • Independent construction of real estate;
  • Business expansion;
  • Development of a new direction.

The average rate for this credit is 10% for up to 10 years.

Working Capital Financing

In this case, the funds are directed to the purchase of raw materials and materials used in the production process. It is noteworthy that the amount of working capital loans is not less than loans for investment purposes, but the terms are much shorter.

Overdraft

Opening an overdraft means the consent of the bank to provide a loan within the agreed amount as soon as the enterprise needs it. For example, this happens to cover the cash gap.

The average overdraft rate offered by banks is 11.5% for up to 24 months.

Non-earmarked Loans Secured by the Property

Not every bank will give unsecured loans for small businesses. If the borrowing company gets bankrupt, then the bank will have difficulty returning the lent funds. If there is security, it is enough for the bank to sell the collateral.

The average rate is 15.5% per annum up to 36 months.

Preferential Loans From the State

A small business loan from the state is issued mainly in cases where the business belongs to the industry in which the government is interested, for example, agriculture. Although there are more generalized business support programs.

Currently, under the Small and Medium-Sized Enterprises Incentive Program, entrepreneurs working in the following areas can expect loans at preferential rates:

  • Agriculture;
  • Domestic tourism;
  • Construction, communications, transportation;
  • Manufacturing industry;
  • Health care;
  • Garbage collection and recycling;
  • Production and distribution of gas, electricity, water;
  • A number of high-tech projects.

The essence of state support is that the entrepreneur receives a loan at a reduced rate since the state pays part of the interest for it. That is, the bank makes a discount to the client, and the state pays the loss.

Specific Narrow-purpose Loans

This type of loan is focused on meeting the needs of those entrepreneurs who need financing, but they do not fit into the credit programs offered above.

A vivid example is an agriculture. For the period of sowing, the organization needs money to purchase seeds and other materials to plant. At the same time, revenue will not be received immediately. Therefore, the company needs an individual payment schedule or a delay in the payment.

Another problematic loan item is the purchase of special equipment. The fact is that in most cases, the property being credited becomes the object of pledge. It means that the bank estimates in advance whether it will be able to sell this property in case of problems with the return of the loan. And if the company wants to take a loan for some highly specialized or unclaimed equipment, which the bank cannot sell, then it is quite possible that the loan will be refused.

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