5 ways to reduce the cost of your business loan

A lower interest rate can save your company thousands of dollars over the life of a business loan. But what steps do you need to take to get a lower rate?

The interest rate on a loan reflects the bank’s assessment of the risk that you won’t repay the money. To compensate for its risk, the bank decides how much additional interest to charge you over the rate it gives to its best, most creditworthy customers.

To reduce your rate, you must persuade your financial institution you will repay the money on time and in full, says BDC Business Centre Manager Paul Ciciola. 

He offers these four tips to improve your chances of getting a better rate for your business loan.

1. Boost your company’s profitability

The single most important factor a bank will weigh when deciding your interest rate is your company’s financial strength.

“The more profitable your business is, the better your chances of getting a lower rate,” says Ciciola, who has negotiated hundreds of business loans with entrepreneurs in Montreal.

Your bank will evaluate your company’s financial statements to see whether you have a history of profitability; how much profit you’re currently making; and whether your profits are trending higher or lower. The bank will also look at how much debt you already owe.

It follows that you need to show healthy, sustainable profits at your company if you want to get a lower interest rate. You should also work to reduce your outstanding debt.

2. Raise your credit score

Your personal credit history is another critical factor in the interest rate you will pay, especially if you’re asking for a small loan. That’s because banks treat small business loans in much the same way as they do personal loans, Ciciola says.

Your credit score from agencies such as Equifax and TransUnion depends on your repayment history, how much credit you’ve applied for and how much of your available credit you are using, among other factors.

Even for larger loans, banks will look at your credit score to see how dependable a risk you are, including whether you’ve declared personal bankruptcy. They will also look at your business’s credit rating to see whether your company has a good record of paying creditors.

If you have a low credit score, see our article, How to improve your credit scores.

3. Offer valuable collateral to secure the loan

In keeping with your bank’s goal of reducing the risk of lending to you, your ability to offer collateral to secure the loan is another way to reduce your interest rate.

“If you have tangible assets to put up as security, it can make the loan cheaper,” Ciciola says. “For example, if you have a building as collateral, chances are your interest rate is going to be lower than if you have nothing or a depreciating asset like equipment.”

4. Build a relationship with your bank

A bank is more likely to offer a favourable interest rate to an entrepreneur who’s been a good client over a period of years, Ciciola says.

“Bankers are going to look favourably on clients who have a long history with the bank and an excellent repayment history.”

Ciciola says you should strive to develop a strong relationship with your banker by meeting with him or her regularly, delivering documents when requested, being transparent about what’s happening in the business and, of course, making your loan payments on time.

5. Use repayment strategies to reduce interest costs

Even if you can't negotiate a lower interest rate, there are ways to reduce the total amount of interest you pay over the life of your loan.

One option is to make early prepayments when your loan agreement allows it. By paying down your principal faster, you'll reduce the amount on which interest is calculated. This can lower your overall borrowing costs.

Another strategy is to consider a non-blended loan when refinancing or restructuring debt. With a non-blended loan, you keep the interest rate on your existing loan balance and apply the current rate only to any new borrowing. Depending on interest rate conditions, this approach may help reduce interest costs.

Look beyond the interest rate

A low interest rate can help reduce the cost of borrowing, but it’s only one factor to consider when choosing a business loan.

Other features can affect the total amount of interest you pay over the life of the loan. For example, flexible repayment options, the ability to make early prepayments and financing structures that fit your business’s needs can all help reduce borrowing costs.

If you're refinancing or taking on additional financing, it may also be worth exploring options like a non-blended loan. Depending on your circumstances, this type of financing may help lower the amount of interest you pay.

“The cheapest loan isn’t necessarily the best loan for you,” Ciciola says. “Look for financing on the basis of what your business needs, not the interest rate.”

By considering both the interest rate and the overall structure of your financing, you can make a choice that supports your business while helping keep borrowing costs under control.

Next step

Looking to improve your chances of securing better financing terms? Start by strengthening the fundamentals lenders look at, like profitability, debt management and cash flow. Download our free cash flow calculator to help you better manage the cash that comes in and goes out of your business.