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How Interest Rates are Determined on Business Loans

By Vikash Kumar Subscribe to RSS | April 28th 2012 | Views:
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If you ever have applied for a business loan, you would have wondered how and what criteria they use to calculate the rates and terms. When it comes to business loans, they rarely go with the prime lending rate, and so it gets more mysterious how they calculate your interest and how long they allow you to stick on to your borrowed money. All the factors that credit unions use to analyze and take decisions on your business loans are what we call potential risk assessments, and these assessments are made based on who you are, and your capacity for payments.

Most of the loans on small businesses would need a personal guarantee, and every bit of your credit report has an impact on their decision. If it appears to be sketchy, then they would probably charge you with a high interest rate. Banks calculate the interest rate of your business loans by certain benchmarks, such as prime interest rate. That means banks charge you based on how they have charged their most credit worthy customers. While this might not be the case always, this is the base rate accounted by 75% of the banks.

Prime interest rate is highly influential and important for small businesses, because it’s sort of a base rate from which they decide on what interest, they should loan out the money to you. Most of the time, small business owners are charged a few points to the existing prime rate. In times of economic crisis, businesses even have to pay a higher rate of interest. Even the size of the loan is taken into account, and the interest rates fall steeply over a particular slab. For example, loans above a hundred grand have low interest rates than a loan below it.

Monetary and security regulations also determine the interest rates for business loans. For example most foreign banks have a lower rate, of about 6% to 7% whereas domestic banks would offer loan on an 8-9%. But the interest rates usually vary from institution to institution, so a general market enquiry is very useful before committing to a loan that comes in front of you. If the business has a good credit reputation and is an established one, then they charge a lesser interest, compared to a start up. It all depends on how well the small business can convince its lenders- that it is a safe investment for them..

Vikash Kumar - About Author:
This article posted by Vikash kumar about of Mantra4money is offer best insurance plans, home insurance policy and Invest your money in insurance, cancer insurance policy , investment online and more information viste at mantra4money.com/

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