Business Loan Interest Rates

We are often asked why interest rates are high on business banking loans. Borrowers typically expect interest rates and terms that are offered on personal mortgage loans. This can cause problems in your projections and be a frustration when seeking commercial credit. Here are some expectations to be aware of.

Commercial loan interest rates typically coincide with how long the rate needs to be fixed. Rates are usually based on an the interest rate index like the Treasury (TCM). Their are TCM indexes for 3, 5 and 10 years. The lender will choose the index depending on how long your interest rate is fixed. Then they will add a spread on top of the TCM rate. The spread is the banks costs and profits on the loan. Sometimes the spread can be negotiated depending on the lender and how good your loan request is.

Prepayment penalties, risk factors specific to your loan, your bank deposit relationship and overall relationship with the lender can all impact the pricing of your loan. Loan officers may have discretion over pricing for the sake of acquiring or maintaining a relationship with a profitable client.

Pricing can change daily. If you are quoted a rate today and don’t lock it with the lender, there is a good chance it will be different tomorrow. Changes in the index or banks pricing model directly effect your loan. Unless the bank has locked your rate, count on it changing.

The bottom line is this: Do not expect personal loan interest rates to be issued on a commercial loan. Their are many other factors that go into pricing a commercial loan. Lenders typically have commercial loans on their books longer than personal loans. For this reason they must price them higher because they keep them for a longer period of time.

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