NFIB

Is a Business Loan With the Lowest Interest Rate Always the Best?
04/ 11/ 2002

Bank advertisements lead many people to believe that it is best to shop for the lowest interest rate -- and that receiving the lowest rate is preferable. This is not always the case, as Jeffrey Moses shows in today's Workshop.

While there is nothing inherently wrong with securing a loan that has the lowest rate available, there are other factors to consider when shopping for business loans. First and foremost, remember that when speaking with a bank or other lending institution about a business loan, your company really should be seeking a long-term relationship that will enable you to receive funding whenever needed -- for inventory buildup before the holidays, cash shortages, special marketing events, etc. The best way to do this is to establish a line of credit, or at least receive a commitment from the bank that funding will be available for you. Of course, if your financial situation changes dramatically for the worse over time, a bank will re-think its loan policy towards you.

A bank may present you with a low rate, but not offer you all the money you require. Clearly, you should continue looking for loans, even if they have a higher rate. When a bank doesn't offer you all the money you need, you might have difficulty establishing a relationship that will make it easy for you to come back again for future loans, even after you have paid off the first loan satisfactorily. Always speak frankly and openly with loan officers, informing them about your desire to form a long-term relationship, or even to establish a line of credit. Don't be shy about it, or think that saying you may need more money in the future will weaken your chances of receiving a loan in the first place. Banks know that businesses need money from time to time. If a bank is eager to establish such a relationship, but doesn't offer a rate quite as good as a bank down the block, go with the chances for a long-term relationship. For added information about this, please see the former Workshop target="new">Tips for Working with Your Bank"

A brief note regarding the previous point: if a number of banks offer you less money than you feel you need, you may have to reconsider the amount you're seeking. No bank will lend more than they feel your company can payback, so you may have to readjust your expectations.

Some banks will ask that you leave a certain amount of funds with them as security when you take out a loan. This may be in the form of a CD, savings account, or checking balance. Based on this, they may be able to offer a low interest rate -- but the money you tie up as security effectively raises the interest rate because it is money that you cannot use for business expansion. Some banks may even require a certain percentage to be paid in order to keep a line of credit open. This also effectively raises the interest rate that you pay.

Quite often you'll find that interest rates don't vary that much from bank to bank within a regional area. So seek long-term relationships, not the lowest rate. Partnering your business with a bank will help your company as it continues to grow and prosper.

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