You’ve compared different types of financial products. You like the convenience and versatility of a small business line of credit. You’re almost ready to apply, but you need one piece of crucial information: how much is this going to cost you?
While you won’t know for sure until you finally get an offer from a lender, it is possible to get a general sense of the rates you’ll encounter. Remember that there will always be outliers; lenders offering rates better or worse than the average.
Below, we’ll look at some of the small business line of credit rates offered by popular online lenders. We’ll also take a look at how lenders arrive at their rates and what you can do to increase your chances of getting a good one.
Current Rates For Popular Business Lines Of Credit
Here are the current business line of credit rates for some popular lenders:
|OnDeck||11% – 57.9% APR|
|Kabbage||24% – 99% APR|
|BlueVine||15% â 78% APR|
|Lendio||8% â 24% APR*|
|Wells Fargo||6.7% and up APR|
|SBACapline||7.25% â 12% APR|
*Note, as an aggregator Lendioâs rates may vary based on the lender you are matched with.
Note that although this is an example of the rates you might receive, business line of credit rates can vary enormously; even two different LOCs offered by the same lender may fall within a huge range. Still, it can be helpful to have an idea about how much you might be charged.
Making matters even more complicated, many lenders (the ones who do disclose their rates at all) don’t always use the same measurements. Interest rates may be listed annually or monthly. You may be quoted a factor rate instead of an interest rate. To simplify things a bit, we’ve listed the sample rates below in terms of APR. Note that an APR is not the same thing as an interest rate. It’s a way of comparing the total costs of borrowing between lenders.
How Lenders Determine Your Interest Rate
Before your application ever enters the picture, your lender factors the costs and profit margins to determine the lowest possible rates at which they can lend. For banks, this number is called the prime rate, which is based on the federal funds rate. In practice, you’re unlikely to be lent money at prime; bank rates usually start a percentage point or so above prime. Alternative lenders typically have private investors looking to make a profit by targeting higher-risk customers than banks, so their rates will almost always be higher than those of banks.
When you apply, your credit rating will usually play a very big role in determining what side of the interest rate range your offer falls on. The better your credit, the better your rate (usually). For business lines of credit, they might be checking your business credit score as opposed to your personal score, though you’ll want to clarify that with them.
There are other factors your lender may use to determine your rate, what we affectionately call “the 5 Cs of credit.” They’re trying to assess:
- Your Character: An abstract sense of your reputation and trustworthiness. This may include your credit report, but potentially things like how long you’ve been in business and personal references.
- Your Capacity: Your ability to repay the loan. This may include looking at other debts you’re servicing and your business revenue.
- Your Capital:Â How much of your own money are you putting toward the investment for which you’re seeking funding? This may take the form of a down payment.
- Your Collateral: Assets the lender can seize in the event that you default. In the case of secured lines of credit, this may be a physical asset, your inventory, property, or a cash deposit. For unsecured loans, it may be a personal guarantee or a blanket lien.
- Conditions: These are the prevailing winds affecting lending broadly; the state of the economy, the prime rate, economic forecasts for your type of business, and the competition faced by your business.
The good news is that most of these factors are things you can do something about. Take character, for example. You could always work on improving your credit rating, but that’s not the only way. Building a good working relationship with a bank you eventually want to lend to you makes you more of a known quantity. Similarly, you can work on your capacity by improving your debt-to-income ratio.
Where To Get Business Lines Of Credit
Business lines of credit are a little less common than business term loans, but they aren’t exactly rare either. Many lenders that offer business loans also offer business lines of credit.
- Banks And Credit Unions:Â Almost all banks will offer some form of line of credit, and most will have at least one business line of credit product. Credit unions are less likely to dabble in business lending, but if you belong to one, it’s worth asking. Expect a longer application process and more stringent requirements. The payoff is in the rates. If you have excellent credit, your interest rates may come in just a few points over prime.
- Online Lenders: Businesses with less-than-stellar credit, or that need to be approved within a very short period of time, may want to consider an online lender. You’ll be looking at higher rates–8% if you’re really lucky, but double digits should be expected–but also a much more painless application process in most cases. Keep in mind, there’s a huge difference between a reputable online lender and a predatory one, so do your due diligence before you sign your life away.
- Small Business Administration (SBA): The SBA doesn’t usually directly lend to businesses; instead, it guarantees loans offered through lenders with which it has partnered. This guarantee helps businesses qualify for rates and amounts that they otherwise wouldn’t. The SBA offers four types of lines of credit through its CAPLines program: working capital, seasonal, contract, and builder’s. Each has specific limitations on what they can be used for and offer credit limits up to $5 million. With rates between 7.5 and 10%, they’re a pretty good deal too. Just don’t expect speed when you’re dealing with the SBA; the time to funding can usually be measured in months.
Hopefully, you now have a better idea of the cost of a line of credit. If you want to learn more about the terms and processes involved with business lines of credit, we can walk you through how they work. Ready to apply? Check out our suggested lenders.
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