As a business owner, you probably are accustomed to making difficult calls, such as what products to stock and what staff members to hire. However, do you know how to select the right business loan? The wrong selection could make or break your company and it’s future.
The key to picking the proper business loan is to have an understanding of Annual Percentage Rate or APR and a business loan advisor to find you the best option for your unique situation.
Becoming a more educated borrower and business owner by knowing what annual percentage rate is, how APR may be utilized to compare business loans, as well as when it may or may not be the ideal method of evaluating them.
Interest Rate vs. APR
There are five different methods of explaining the expense of borrowing funds:
Nominal Interest Rate:
This is the interest rate for the loan’s term. For instance, the lender may say that the interest upon a six-month $10,000 business loan is $500. The nominal interest rate will be 5 percent, in that case.
Nominal Annual Percentage Rate:
This takes the nominal interest rate and annualizes it. For instance, the nominal annual percentage rate on that $10,000 business loan aforementioned is 10 percent because you must take the interest rate for the six-month term (at 5 percent) and then double that to achieve the annual rate.
Effective Interest Rate:
Effective interest rate is an annualized rate which takes compounding into consideration. Compound interest is the interest which is calculated on the original loan’s principal and on the interest you have already paid. It’s possible to compare it to an interest-bearing account, where interest is earned upon interest. Commercial loans work in the exact same way, except that you’ll pay the interest rather than earning it. Each time you make your installment payment on the loan, you’re effectively borrowing fewer funds, yet paying the same amount of interest.
Effective Annual Percentage Rate:
Effective annual percentage rate (occasionally just referred to as the EAR/ effective annual rate) includes an annualized rate which takes both loan and compounding fees (e.g. origination fee, application fee, etc.) into consideration.
A factor rate informs you how much funds you must repay in total to the lender. The factor rate for the example above is 1.05 because $10,000 x 1.05 is $10,500 (overall quantity you must repay). Generally, the factor rate isn’t a good measure of cost because it’ll wrongly assume that you will repay all fees and interest in a lump sum at the completion of your loan. It does not take compounding into consideration or the term of the loan.
How to Compare and Evaluate Loans
In the perfect world, the lender would provide you each of these 5 rates in order for you to see how the length of a business loan, fees, and compounding, affect its cost and then compare it to additional loans. However, in most cases, you’ll just be told one or two cost measures. It’s okay if this information is overwhelming and that is why it is important to have a profession loan advisor to explain throughout the process.
Unlike a consumer lender, a corporate or business lender isn’t required to disclose the annual percentage rate. Nevertheless, business lenders usually disclose APR for institutional laons. But, some private lenders usually do not disclose APR. And why? Because those lenders offer short-term commercial loans, which are typically higher then most institutional lenders. Additionally, most of their client’s value convenience and speed over cost so there are clear benefits of going with a private commercial lender. In turn, lenders usually quote a nominal factor rate or interest rate rather than an annual percentage rate.
Should You Always Select the Lower APR Loan Over the Higher APR Loan?
For owners of businesses who want to purchase inventory, pay vendors, or otherwise use short-term funds, it might make more sense to obtain an alternative loan. Although the annual percentage rate is greater, you’ll wind up paying much less cash out of pocket and at the end it may be the only option for your business or real estate venture.
Borrowers, on the other hand, who have a desire to invest in their business for a longer term are going to do better to opt for an SBA loan, in spite of its higher-dollar cost.
SBA loans have long 10-year terms, so you’ll need to pay just a small quantity of the loan back with every installment. As a consequence, you gain access to the loan funds (in addition to the fees you’ll eventually need to pay) for a longer time period. It’s possible to use the money, for instance, to remodel the store over a couple of years or to employ a part-time staff member, which might assist you in realizing a good return on investment.
At “AS IS” Loans, we offer long term and short term flexible prime and sub-prime rate loan solutions ranging from commercial to residential, private loans, bridge loans, mezzanine loans, mergers & acquisitions, renewable energy loans, WTE financing, throughout the United States and Worldwide. We can provide you with the commercial loan you need with the terms you deserve.