Interest rates are important to the financial health of your small business. These rates are the percentage of money a company charges in order to issue a loan, be it on a leased piece of equipment or an outright exchange of cash. Not only does the interest rate serve as collateral should you default on your end of the agreement, but it helps keep the lender in business. Understanding rates and how they work, as well as how they change or fluctuate over time, is important.

Risk vs. Worth

Interest rates are calculated by your risk factor. If you have poor credit, a shaky financial history or an uncertain future, your rates will be higher than someone with well-established credit, an easily projected business growth and good financial decisions in their past. While banks, lenders and other institutions strive to offer competitive rates and thus try to offer you the lowest rate possible, your riskiness versus worthiness factors in.

External Factors

It isn’t just about you, though: many external factors can also influence interest rates. The state of the stock market, inflation, demand for lenders and credit to name just a few. Because of this, double check that you’re entering into a fixed rate agreement or you could be subject to creeping interest as factors out of your control wreak havoc on your small business’s finances. If a fixed rate loan isn’t an option for your business, talk to your accountant about what other options are available for your small business.

Accounting Considerations

When taking out a loan, it’s important to plan for every scenario. Having projected cash flow and business growth charts can be helpful to ensure you’re meeting your goals to pay back your loans on time every payment period. Setting aside extra capital when possible to account for raising rates on variable loans or just to cover yourself if you don’t meet your goals one period can help prevent a downward spiral in which your credit is negatively impacted.

How They Affect Your Business

Even if you enter into a loan agreement with a high interest rate, repaying it on time and every time can build up your business’s credit to unlock lower interest rates in the future. By staying within your means and not overextending your credit, you’re showing lenders you’re responsible and take your business’s financial health seriously. So, when it comes time to borrow again, you’re more likely to have access to lenders who will help you secure lower rates with more amenable terms.