What’s My Interest Rate Going To Be?
One of the first questions commercial and small business borrowers have when it comes to securing financing is ‘what’s the rate?’ Lenders will usually shy away from answering the question until they know enough about your business to make a decision. There are several factors that contribute to establishing the interest rate for commercial and small business loans. Your interest rate is determined by your credit history, the loan-to-value (LTV) of the property, market conditions, and additional factors associated with your deal. Other factors associated with your loan also affect your bottom line as a business owner such as the terms and conditions of your financing. Does your loan have a pre-payment penalty? Is your rate fixed or adjustable? If it is adjustable, do you know what index your loan is tied to, or what triggers the adjustment? All of these questions should be answered clearly before you decide whether a particular loan offer is suitable for your business.
Does The Loan Make Sense?
Commercial and small business loans must make sense for the lender and the borrower. Lenders like to see that you are a good credit risk and they will be able to recover their investment. Sometimes, if you are a new business or operate in a risky business sector that will be reflected in the loan offers you receive. You may be offered a higher rate to offset the risk you pose to your lender. On the other hand, it is often much easier to obtain small business or commercial financing than it is to get a residential loan. Lenders make decisions based on your loan package, or loan application. They review the information to determine whether lending you money makes sense financially.
Commercial And Small Business Interest Rates
Commercial and small business financing is available from many different sources. You could utilize a finance company, a domestic bank, an international bank, a large institution, or small. Do your homework, know exactly what you need and why you need it and you will increase your chances of working with a lender that can offer you the right loan for you commercial and small business needs.
Remember that commercial rates and terms will vary based on region, the strength of a company and the value of its assets. Foreign banks tend to offer the lowest interest rates, while small domestic banks usually offer higher rates.
Here are some average commercial and small business interest rates:
Average Interest Rates (varies based on LTV, DSCR, loan amount, overall loan quality, etc.):
Office: 5.65% - 8.50%
Retail: 5.75% - 8.85%
Industrial: 5.75% - 8.75%
Multifamily: 5.25% - 7.35%
Mobile Home Park: 5.50% - 8.70%
Hotel/Motel: 6.25% - 12.0%
Healthcare: 6.65% - 10.15%
Self Storage: 5.90% - 8.55%
Mixed Use: 6.70% - 12.5%
What Else Do I Need To Know?
There are many details you will need to be aware of as you search for commercial and small business financing. The following tips should get you started on the right path.
• Ask about the average maturity or interval between rate adjustments. Usually a longer maturity is preferable, especially when rates are going up, as it brings steadiness to your organization’s financial planning. Recently, small domestic banks offered small business and commercial loans with the longest maturity. Foreign-based banks offered loans where the maturities were shortest.
• Ask your lender about ‘call provisions’ in your loan. A call provision enables your lender to ‘call’ your loan due if you fail to uphold your end of the agreement. Many small businesses look for non-callable loans. Most commercial loans do not include this provision; however, foreign-based banks are almost twice as likely to require this provision as a condition of your commercial loan.
• Ask your lender if your small business or commercial loan includes a pre-payment rider. This is a loan provision that requires you to pay a fee if you pay off your loan early. Sometimes your lender will remove it, or, offer you alternative loan options that do not include a pre-payment penalty.
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