When shopping for commercial financing, avoid focusing too closely on costs. On a loan of tens or hundreds of thousands of dollars, a difference of $50 or $100 per month will have little impact on your business, so you should choose the commercial financing that best matches your needs and seems the most trustworthy, instead of the lowest cost provider.
Business owners who aren’t familiar with commercial financing tend to have unrealistic expectations when comparing interest rates, usually because they try to equate extremely low home mortgage rates to business loans. Banks are willing to offer 6% rates on home mortgages because the home itself will always be there and is almost guaranteed to go up in value, so their investment is fairly well guaranteed.
That’s just not the case with businesses. Businesses can fall in value or even go bankrupt. To compensate for those additional risks, lenders have to charge more for commercial financing. Typical rates right now range from 8 to 14 percent — but you will always find higher and lower rates. In some cases, you won’t even be quoted an exact interest rate. Instead, the lending company will simply tell you what your total monthly payments will be, including all fees and interest.
The most important step you can take when comparing commercial financing is to be sure you’re comparing equivalent fees! When you get a quote, ask what your total monthly payments will be. Even if you are quoted interest rates, don’t shop on those alone — some lenders will deliberately offer tempting low rates of 6 or 7 percent, then add steep fees to your monthly payments that bring your total back up.
In general, the best commercial financing rates can be obtained from banks that know you, and the steepest will be from small lenders who focus on high-risk or startup businesses. Often you will be able to negotiate some of the fees involved in the loan, but the interest rate is usually determined by a specific formula the lender has in place, so you usually won’t be able to get that moved.
Many businesses use credit cards to finance operations at first — when you consider that many carry monthly finance charges of 18 percent and can jump to 25 percent or more after one missed payment, you can see why commercial financing is a better source of emergency funds.
In most cases, you’ll have to pay an application fee, which in some cases may be non-refundable. If you must pay a non-refundable fee, make sure it’s fairly low — less than $100, for most loans. Read the contract carefully to make sure there are no other hidden fees you’ll be responsible for.