Curious how the interest rate for your business loan is determined? In this article we explain and show you how we calculate your interest rate. And: 4 tips with which you can cleverly handle the interest rate.
This is how the interest rate of your business loan with lender company is built up
In the graph below you can see from which ingredients the interest rate of business loans at lender company is built up.
Basic interest: These are the costs for purchasing money on the money market. That is why the base rate is also referred to as the market rate.
- Capital costs: We must always maintain a capital buffer and incur costs for it.
- Margin: This is the profit that lender company makes. We invest part of the profit in the company and part of it to our shareholders.
- Operational costs: These are the costs for our staff, the systems, our office and other fixed costs.
- Risk costs: These are the costs with which we cover the risk that the loan will not be repaid. The level of the risk costs depends on the risk profile of your company.
Financial health of your company and the risk
If you borrow money, there is always the chance that you cannot pay off the loan. A financier must take this into account in order to be able to lend money and therefore charges risk costs, or risk premiums. To estimate the level of the risk costs, a financier looks at the financial health of your company. The better you are financially, the higher the chance that you will pay back the loan and the lower your risk costs.
The length of the period over which you repay the business loan, or the term, influences your interest rate. The longer the term, the higher the interest. This has to do with the prices on the money market, where the bank buys money to be able to lend. For long-term financing, inflation is taken into account, making money more expensive for such loans. This translates into a higher interest rate.
Amount of the loan amount
The more you borrow, the lower your interest rate. The bank incurs one-off costs for a loan, which are the same for each loan. With a higher loan amount, the share of those costs is smaller, so you get a lower interest rate.
Can I lower the interest rate on my business loan?
You can lower the interest on your business loan by improving the financial health of your company. Borrowing money from a financially sound company means less risk for a financier and that often translates into a lower interest rate. Check our tips to improve your profitability, our tips to increase your solvency and our tips to increase your liquidity.
Interest tips before you apply for a loan
- Be critical of financiers. Request different quotes and compare the conditions. Pay close attention to interest rates: do they apply per year or per month?
- High interest? See if you can improve the financial health of your company. Please note: this improvement can only be seen one year later in your annual figures
- Choose a shorter term: the bank charges a higher interest rate for a longer term. The disadvantage is that you have to repay faster and therefore have higher monthly payments
- Do you compare interest? Please note that some financiers communicate an interest rate per month and others a percentage per year.