Understanding the true cost of your business financing can be tricky, especially when there are so many ways to interpret the different rates and percentages. What does a “good” APR look like and what can you do to qualify for one? We’ll break it down for you to help eliminate the guesswork for small business owners like you.
What is APR?
The term APR stands for Annual Percentage Rate. When it comes to business financing like credit cards or loans, this number will reveal exactly how much debt you’ll be repaying in interest on a yearly basis. It’s calculated by taking into account interest rates, fees, and all other associated costs.
APR vs. Interest Rate
When you encounter interest rates, remember that they’re only a component of APR. Using APR as your criteria instead of base interest rates will give you a clear and more complete picture, especially when you’re comparing different funding options.
A factor to consider is that APRs may change over time throughout the life of your loan. This will be reflected in your loan details with either fixed or variable APR. Typically, variable APRs will be adjusted depending on a base rate, like the Prime Rate which is set by the Federal Reserve. On the other hand, fixed rates will not be updated regularly while you’re repaying your loan. If there are any changes for any reason, your lender will have to notify you in advance.
What’s a Good APR?
There’s no one way to determine whether an APR is “good.” Because the rate is made up of different components and can change over time according to various factors, you should decide if the rate works for you by comparing it to similar alternatives. For example, if two loans with approximately the same terms and interest rates have significantly different APRs, that should tell you that one has much higher fees than the other. Otherwise, it can be hard to judge what makes an APR “good.”
Also, be wary of promotions claiming that a certain product has a 0% APR. Usually, this offer is for an introductory period only. The APR can suddenly jump to double digits. Read the terms and conditions behind an enticing APR offer before signing up.
How to Improve APR
Financially healthy borrowers who can demonstrate their ability to meet regular payments are typically eligible for lower APRs and longer terms. To lower your available APRs, work on building your personal and business credit. Some of the steps you can take are staying on top of your payment schedule, keeping your credit utilization low, and monitoring your credit report to ensure you’re on track. The same idea holds for both personal and business credit. Learn more about establishing your credit on our Small Business Blog.
At SmartBiz Loans, we connect you with the lending partner who can provide a low-cost, long-term loan guaranteed by the Small Business Administration. The interest rates associated with SmartBiz SBA loans are variable, calculated by adding a percentage to the current Prime Rate plus 1.5% to 3.75%.
Before applying for an SBA loan, get started with SmartBiz Advisor to learn where you stand in terms of being Loan Ready, based on the key criteria that banks use to assess your business. This free, online tool will serve as an educational resource for you as you prepare to apply for the low-cost funds you deserve.