Business Loan Margins

12 May 2016

What are the risk margins on a business loan and how do they change the interest rate you pay?

Business loan providers offer an advertised interest rate on their loan products – but then they may also apply a risk margin based on each specific applicant. This margin is like an extra interest rate that applies on top of the advertised rate. The margin is not always an extra charge on the interest rate, however. Some institutions may advertise a really high interest rate but always apply negative margins, so the consumer gets an interest rate that it is cheaper than whatever is advertised.

You can’t know before applying what the lender will judge your risk margin to be, but you can learn what lenders consider and how to minimise the risk you present. The less risk your business presents, the lower your risk margin will be, so you’ll pay less in interest over the life of your loan. Now that’s business sense.


How do lenders set your risk margin?

When setting a business loan margin, institutions will consider factors including:

How long has the business been around, and how successful is it?

Obviously if your business is relatively new, you can’t change that fact. What you can do is make sure your business is already as successful as possible and/or that you have a well thought-put and detailed business plan before going to the lender and asking them to help your business grow.

What customer base does the business have? Is the customer base diverse or do they target a specific market only?

If you serve a niche market, you may need to provide evidence regarding the popularity of your product or service. For example, you might point to other businesses doing well in related markets.

You may also show the lender proof that you have a diversified range of people interested in this niche. If you have a website or a Facebook/other social media page, then you can gather insights such as the demographic of your clientele and visitors to your site.

Is the business located in a high traffic area or good location? Does it have good visibility?

You don’t have to be located on the main street of the CBD in order to get noticed. You can provide a lender with statistics about how many walk-in customers you get every day or week.

If you run an online business, high traffic or good visibility can be judged by your SEO presence. When people Google your product or service, is your business listed on the first page of results? Studies show that few people look past the first page, or in fact past the first three results. Other studies show that people spend more time and pay more money on websites linked higher up in Google’s rankings.

Is the business able to service its debt?

This is mostly a question of income and expenses. Is your business making enough money that it can afford to pay its usual monthly expenses and the repayment on a business loan or overdraft account?

How much is the business borrowing and for what reason – is it working capital, or is it to buy an asset?

Business loans or overdraft accounts often come with a maximum credit limit, with many as high as $1 million. A business should be applying for a loan amount that matches the purpose the loan is for.

We research and rate over a hundred business loan products. The products that receive a 5-star rating are typically available for almost any business-related purpose, from temporary cash flow to pay your employees, to buying new computers, to renovating a shopfront. That’s why we rate Overdraft and Line of Credit products along with traditional Business Loan products.

And finally, the business’s balance sheet.

Does the business have good equity and good growth? Is it profitable?

What that means for business owners…

Information is power and with the above knowledge of how lenders will be assessing your lending risk, your business stands a better chance of preparing to apply for a business loan or overdraft.

In 2016, we have researched 90 business loans and business overdraft products from around Australia and given them star ratings according to how much value they provide to business owners. Take a look at our comparison tables to see which products would provide 5-star rated outstanding value for the needs of your business.


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