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How Businesses Can Work to Manage Interest Costs
Businesses carry debt, and even some of the world’s largest companies will have what seems to be a substantial amount of debt to the average person. Debt can be useful for a business because it allows the business to maintain a high level of cash flow and balances.
Acquisitions and growth are often a result of cash rather than they are taking on debt.
Managing interest costs is essential for a business, and different levels of businesses will have different options available to them.
Business Credit Cards
Credit cards have higher interest rates than other loan options. Rates can be variable, which means that they go up or down, costing businesses more money in the process. If you calculate your credit card interest, you’ll find rates can be:
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13% on the low end
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25% on the high end
Annual fees, bonuses and rewards may also be part of the credit card’s terms. The issue with credit cards is that the interest rates are much higher, so the card may have a 13% interest rate, 25% interest rate or a rate that is drastically lower or higher than these amounts.
Due to these high interest rates, it’s important to use credit cards as a last resort in business.
There are just other options that may be available, depending on your business’ credit history, finances and stability.
Small Business Loans
Small business loans sound great, but they may also have a very high interest rate. You'll find that a traditional bank may offer an interest rate as low as 3%, but alternative lenders may have inflated rates as high as 150%.
SBA loans are often the go-to option for small businesses, and rates will range from 7.5% to 10%.
In all of these cases, except for a loan from an alternative lender, the rates are much better for a small business. These loans will provide a small business with the cash they need to pay operating costs, fund equipment purchases or fund other expenses.
Business Line of Credit
Business lines of credit are great options, and the ability to continue to use the funds in these accounts provides the utmost in flexibility. These accounts can offer opportunities of $200,000+, so businesses will be able to enjoy a healthy, stable option to take on credit.
Lower credit limits will be for loans that are unsecured, while higher limits are secured and offered a lower interest rate.
While terms may be better than a credit card, a line of credit may have an APR of 10% or 80% - it depends on the business’ credit history as well as if the loan is secured or not.
As businesses mature, it’s not uncommon to request an interest rate be reduced. This is true when a business has worked with a lender for an extended period and has built a strong credit history with them.
Management should look at interest rates, offloading high-interest rate loans for loans that have lower rates. Keeping interest rates as little as possible can save a business tens of thousands or hundreds of thousands of dollars per year.
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