How much will an LLC loan cost?
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Getting an LLC loan is a great way to get the cash you need to grow your business, but it’s important to remember that the loan comes at a cost. You must consider the interest and fees you’ll pay and how they could impact your company in the long run.
We’ll break down the typical costs for an LLC loan so you can find a good deal and make sure a loan is right for your company.
The most basic cost of any loan is interest. Depending on the type of loan, lenders may charge interest in two different ways.
One is through an interest rate like you’d see on a consumer loan like a personal loan or credit card. This is a percentage of your loan’s balance that is added to the principal. Your monthly payments typically pay off the accrued interest plus a portion of the loan’s principal.
The longer the loan’s term, the more interest accumulates.
The other way to charge interest is through factor rates. Factor rates are expressed as a ratio of the loan amount that you must repay to pay off the loan. For example, a loan with a 1.15 factor rate means you need to pay back 1.15 times the amount you borrowed.
Because the loan doesn’t accrue interest over time, the term of the loan won’t impact how much you have to pay to repay the loan.
Generally, lenders use interest rates for longer-term loans and factor rates for short-term, high-cost loans loans such as merchant cash advances.
|Loan type||Typical interest rate range||Loan purpose|
|Term loan||5% and up at traditional lenders; higher for online lenders.Median rate is 5.39% for fixed, 6.25% for variable||Medium- to long-term financing|
|Business line of credit||4.5% to 30%+Median rate is 5.13% for fixed, 6.8% for variable||Flexible access to cash to cover short-term expenses|
|SBA loans||Prime rate + 2.25% to 8%||Borrowing large amounts for long periods|
|Invoice factoring||Fee of 1% to 5%||Getting paid on invoices more quickly; working capital|
Interest rate vs. APR
When looking at loan offers, don’t forget that there is an important difference between APR and interest rate.
The interest rate of a loan is the percentage of the loan’s balance that is added to the loan each year. It does not account for any other costs or the compounding schedule.
APR is a more accurate look at a loan’s overall cost. It includes the interest charges and accounts for the compounding schedule. It also includes fees in the rate.
Suppose a $100,000 loan has an interest rate of 6 percent, a 10-year term and a $2,000 upfront fee. The APR would be 6.45%
Factors that impact interest rates
Different businesses can expect to see very different factor rates and interest rates on their loans. Lenders charge different rates depending on the risk of default they believe your business poses. Factors include:
- Credit score: Your personal and business credit scores will impact the cost of borrowing. The better your credit, the less you’ll pay.
- Revenue: Companies with high revenues might be able to secure lower interest rates because lenders think they’ll be able to repay the debt more easily.
- Time in business: Lenders view newer companies as riskier than established ones. Older businesses will likely see lower interest rates.
- Other debt: The less other debt your company has, the more easily it will be able to repay the new loan, helping lower rates.
- Profitability: If your company has high revenue but high expenses, it may not have a lot of free cash to make payments on a new debt. Higher profit makes a company a less risky borrower.
Many LLC loans come with loan fees in addition to interest rates or factor rates. It’s important to know what fees you might pay and whether you can negotiate or avoid them.
Some lenders will try to charge an upfront fee when you apply for a loan. You may be able to negotiate this fee away, but it’s often better to avoid lenders that charge this fee.
Origination fees are common on term loans and other large loans. They’re a percentage of the borrowed amount, often between 2 percent and 5 percent.
The borrower may take this fee out of the amount disbursed to you or add it to the principal you owe.
You may be able to avoid this fee, especially if you have good credit. Look for lenders that don’t charge it or try to negotiate with your lender.
SBA loan guarantee fees
This fee only applies to SBA loans and only to the guaranteed portion of the loan. You cannot negotiate these fees, which range from 0.50 percent to 3.75 percent, depending on the loan type and amount.
Monthly or annual fees
For invoice factoring deals or lines of credit, your lender might charge an ongoing administrative fee, such as a monthly fee or annual fee. Usually, these fees are a flat amount and can range from $50 to $200 or more.
These fees are negotiable, so work with your lender to avoid the fee if possible.
Late payment fees
If you miss a payment due date, your lender will charge a late payment fee. This is true of almost any type of loan. The amount may be a flat fee or a percentage of the owed amount.
If you don’t miss payments often, try asking your lender to waive the fee if you do make a mistake. Many lenders will be willing to cut you a break now and then.
Some loans, generally long-term loans or equipment loans, can come with prepayment penalties. You’ll pay this fee if you pay the loan off ahead of schedule.
The fee is usually a percentage of the prepaid amount and can range from 1 percent to 10 percent, depending on how early you repay the loan. Or, the fee may be based on the interest you’d owe if you repaid the loan according to the original schedule.
Many lenders offer loans with no prepayment penalty, so if you think you’ll pay the loan off ahead of schedule, look for a lender that doesn’t charge the fee.
Before applying for an LLC loan, it’s important to think about other costs your company might face.
If you’re getting a term loan, especially one secured by an asset, may be required or want to make a down payment. Making a down payment benefits you because it means a smaller principal on which you’ll owe interest. It benefits the lender by reducing the amount of money they lose if you default.
For example, if you’re buying a $50,000 piece of equipment, the lender might want you to put down $10,000 and lend you $40,000 to cover the rest of the purchase.
Negotiating LLC loan costs
In business, almost everything is up for negotiation. Except for highly regulated loans and government programs, like SBA loans, you can try to work with your lender to secure a better deal.
There’s no harm in asking your lender to lower your loan’s rate or waive a fee here or there, especially fees that aren’t universal across all lenders, like origination and application fees.
Comparing lenders and taking the time to talk to them about fees could help your company save a lot of money.