Interest Rates

If you choose to apply for a traditional business loan, you will have to be prepared to pay back more than the amount you borrow, because lenders will charge you interest as payment in exchange for being given the loan. The interest rate you will be charged is likely to reflect the feasibility of your business plan; the less stable the plan is, the less likely it is to succeed and therefore the higher the interest rate you will have to pay. The interest rate which is assigned to you will be a percentage of the value of your loan; often the interest charged is equal to the minimum monthly loan repayment.

Interest rates generally come in two forms: fixed and variable. If your agreed interest rate is 'variable', it will fluctuate in line with the base interest rate set by the Bank of England. A 'fixed' interest rate means that the interest rate you agree on with the lender will not change throughout the term of your loan. An advantage of fixed interest rates is that you benefit from relatively low loan repayments and interest charges if market rates rise during the course of your loan. This also means that your repayments can be fixed, which enables you to accurately plan your outgoings. On the other hand, if the Bank of England reduces the base interest rate you may end up paying a lot for your loan. Furthermore, if you are in a position to repay your loan earlier than planned, fixed interest rate loans will often charge high fees, whereas variable interest loans tend to charge small fees, or even none at all.

The interest rate which applies to your loan will be agreed with your lender. If you consider the rate to be unfair, you should ask whether the lender is prepared to negotiate: keep estimates from other lenders to compare interest rates; these may prove useful in convincing the lender that you have other offers available, and encourage them to give you a better deal.