Virtually every small business must take out loans to operate and thrive. In seeking a loan, a small business borrower should carefully evaluate what will impact lending rates for his/her loan. 

How Do Interest Rates Help and Hurt Businesses? 

High interest rates can make it difficult for businesses to obtain loans because they become more expensive and may take longer to pay off. Additionally, higher interest rates make it more difficult to take out short-term loans which can have an adverse impact on paying for unexpected expenses or making efforts to expand. Increasing (or high) interest rates can limit a business’s cash flow and interfere with smooth operations. They can make it difficult to budget and plan. High interest rates also lower consumer income, making consumers less willing to spend, thus impacting consumer businesses. 

Low interest rates can spur consumer spending, thus benefiting businesses. Low interest rates can also spur business growth and expansion because borrowing costs are reduced. Business owners are wise in evaluating what will impact lending rates.                                           

10 Things That Impact Lending Rates      

There are 10 things that impact lending rates. 

First, macro factors: 

  1. Economic strength. A strong economy, including low employment, means that demand for goods and services is growing, and interest rates may, therefore, increase as businesses seek to borrow funds to serve the increased demand. Conversely, a weak economy results in lower interest rates due to lenders’ concerns about fewer businesses needing to borrow, plus a higher risk of loan defaults. 
  2. Inflation. When inflation rises or falls, so typically do interest rates. 
  3. Government economic policy. Government actions are used to raise or lower short-term interest rates to address economic conditions. 
  4. Supply and demand. Lenders will increase their rates when there is a high demand for funds. When there is a lower demand for funds, lenders lower their rates to make funding more attractive to borrowers. 

Second, individual business factors: 

  1. Business creditworthiness. Creditworthiness is measured by the business’s credit score. A good credit score will result in a more favorable rate of interest. 
  2. Time in business. Startups and businesses with less than two years of history are seen as riskier. Thus, loan requirements may include higher interest rates for younger businesses versus more established businesses. 
  3. Company financials. It is important to maintain cash flow and continuously monitor your business financial statements to demonstrate continuing business health. Poor financials will negatively impact lending rates. 
  4. Collateral. Often, business loans are lent against collaterals. The amount of collateral provided will impact the interest rate of the loan. 
  5. Type of business. Some types of businesses will be viewed as riskier than others and thus will be charged higher interest rates. 
  6. Future growth prospects. If a business is seen as offering higher growth prospects, interest rates will likely be lower than if not.                                                   

Seek Expert Financing Assistance 

Contact Emerald Valley Financial Services, based in Eugene, Oregon, to get the financing your business needs. We provide a wide range of versatile funding solutions, including working capital, lines of credit, and equipment financing and leasing. We provide financial services for businesses of all sizes, including startups and businesses that have been turned down by banks. We are here to help you succeed and grow.