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Expanding your business is exciting, but may require external financing. Before you dive into applications with lenders, it’s smart to research business loan costs. There are a variety of factors to consider when it comes to business financing, and planning can significantly reduce unexpected costs and help maintain financial stability in your business. In this guide, we will explore what you need to know about potential business loan costs.
Ultimately, business financing is complex. For this reason, business loan costs are dependent on various factors. At a high level, these are the things that can affect the cost of your business loan:
The interest rate is almost always the main cost of your loan and will depend on a variety of factors. The major influence will be whether your loan has a fixed or variable interest rate. A fixed interest rate remains the same over the life of your loan, while a variable interest rate changes with the market, though lenders usually have a minimum base interest rate you’ll be charged.
The collateral you provide with your loan will also play a role in the extended rate. Unsecured loans, or loans that don’t require any collateral, will generally have higher interest rates than secured loans. This is because lenders face a higher risk when giving out unsecured loans. If you fail to repay, the lender won’t be able to take the collateral and sell it to recoup its losses.
Your business’s credit score — and your own personal score, if your business is new — will also impact your loan. So will your business plan, revenue, industry and the type of loan you’re seeking. Compare business loan rates to be sure you know the general range lenders charge for interest.
The type of loan your business needs will influence how the interest rate is charged. There are plenty of things to know about interest before you get started, so read up on them before you start the borrowing process.
You may be able to deduct the cost of interest from your income, if the interest payment was for a loan made against an insurance policy. You may also deduct certain fees related to your business loan including application, appraisal, processing and insurance fees as well as legal, finder and brokerage fees. See the Government of Canada website for more information.
Below are 9 fees you may encounter. Business loan fees vary among lenders, so you may not need to pay all of these.
Business loans are often amortized, meaning that you pay the same amount each month. Many have a monthly amortization, meaning that you make a repayment on interest and fees each month.
But some come with weekly, bi-weekly or even daily amortization. Ask your lender for an amortization schedule to plan for repayments before signing the business loan agreement.
Getting a business loan can also come with non-monetary costs.
Click “show more” to view a table of common fees you’ll face with a business loan.
|Financing type||Typical fees|
|Line of credit|
|Canada Small Business Financing Program (CSBFP) Loan|
|Equipment and vehicle financing|
|Business credit card|
|Short-term business loan|
|Merchant cash advance|
Taking out a business loan is a big step. By calculating the cost of your loan options, you’ll be in a good position to make a smart borrowing decision that will benefit your business for years to come. However, there are a number of other factors that you need to consider when borrowing a business loan. Take time and do your research before locking into a financing agreement. Read up on how business loans work so you know exactly what to expect when you apply.
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