By usasmooths 
When people talk about interest rates, they are talking about what banks charge to borrow from them. Most of them might assume that every business gets the same rate on a loan. However, this is not the case at all. Business loans rates are not the same for everyone. A food truck business could be paying more than the dental clinic next door. But why is there such a gap in the interest rates for different industries?
The disparity or the gap exists because when it comes to setting a business loan rate, lenders look at a variety of factors to determine the risks associated with your application. From the type of business you run to likelihood of you repaying on time, lenders will carefully review each and every aspect of your application. And different industries come with different risks and they too affect the loan rates.
While making their decisions on loan approvals, most lenders look at a business as a package of risk factors. Their decision relies on the amount of risk they are willing to take. You must have observed that some industries tend to make money like clockwork while others, it is a roller coaster ride. So, it is important to keep in mind all the factors that lenders look at while setting business loans rates:
- Industry risk (some fail more often than others)
- Revenue patterns (stable or seasonal?)
- Cash flow health
- Credit history and credit score
- Business age and performance
Low-risk businesses with a strong credit profile often get better loan rates. On the other hand, high-risk businesses are stuck with paying more to borrow the same amount. That is the trade-off that everyone has to eventually make peace with.
There are some businesses that come with more borrowing challenges than others and this is because of the unpredictability linked to that business or sector. Construction is one sector that often faces a lot of problems when it comes to financing as there is a pattern of project delays and late payments. These factors can make any lender nervous about approving a loan. Another sector that faces similar challenges is the retail industry with businesses relying heavily on seasonal income and foot traffic – two things that are hard to guarantee.
There are other industries too, including hospitality, where revenue depends more on seasonality. A lot of lenders, when they deal with businesses in these sectors, tend to offer higher business loans rates just to balance out the risks as it is difficult to predict cash flow with these companies.
In these sectors, interest rates are often bumped up to cover the added risk, even if the owner has a decent credit score.
Not all industries are tagged as high risks. There are industries that are more appealing to lenders, mainly because they show a steady source of revenue.
Healthcare is one of the top industries that lenders consider a low-risk one as businesses in this sector bring in steady revenue and are often considered as recession-proof.
Professional services like accounting or law firms with repeat incomes from long-term clients also enjoy favorable attitudes from lenders. And a few businesses in the manufacturing sector, with contracts or bulk orders, also get to enjoy better loan terms than others.
These are the businesses lenders like and offer better business loans rates with longer repayment terms.
Other than the type of industry type, there are multiple factors that influence loan rates. Here are a few of them:
- Business credit scores
- Amount of loans and its terms
- Economic trends, including surge in interest rates
- Whether the loan is backed by the SBA
- Location and competition in the area
In some cases, even the timing plays a key role. For instance, if you are applying during a downturn then you can expect lenders to be more stricter than at any other time.
No matter the industry, every business owner can improve their chances of getting better business loans rates.
- Keep financial documentation clean and organized
- Ensure you have a healthy credit score
- Try to apply during a strong season in your business cycle
- Minimize existing debt before applying
- Seriously explore SBA loans or secured loans as funding options to lower risk
Most of all, do not rush the lending process. Shop around. One lender may charge 12%, another may offer 8% for the same profile.
In the end, it is important to understand that business loans rates are not set randomly. Instead, they are influenced by industry trends, borrower behavior, and lender policies.
If you operate in an industry that faces higher loan rates, it does not mean that you are out of options. It simply implies that you need to be better prepared to get best business loan rates for your business.
So, it really helps to understand how these business loans rates are set as knowing how can help you make more informed decisions and not just the faster ones.
Ahmad Bilal