Interest Rates & Corporate Lending Standards

By Prev Info - October 17, 2022

 Getting a small-business loan may require a strong personal credit history. Business owners who want to borrow money for their corporation face the same kind of burden they would if they were applying for a personal loan. As with a personal loan, lenders want evidence that the business is earning enough income that the loan’s a safe risk to be repaid; likewise, the rate depends on the lender's assessment of the borrower's creditworthiness. Rates vary depending on that risk assessment.

Interest Rates & Corporate Lending Standards

Personal Credit Scores a Factor

For small-business owners, the interest rate for a corporate loan tracks closely with the interest rate available for a personal line of credit. Lenders consider personal credit scores a good predictor for whether business loans of $100,000 or less will be repaid. While that's especially true for businesses structured as sole proprietorships, many small-business owners who set up as corporations nevertheless personally guarantee their loans, further linking their business and personal credit histories.

Documentation Required

Corporate lending standards are similar to the standards used for personal loans, but more documentation is required. Lenders will want to see the business overview and history, ownership biographies and résumés and business tax returns as well as the owners’ personal tax returns. Other key documents include actual and projected profit and loss statements, with an explanation of why the owners think the projected numbers are a reasonable target. Copies of the business lease, if it's a storefront, and any required certification should be included.

Determining Rates

Corporate interest rates vary depending on the perceived creditworthiness of the business. A corporation with a solid cash flow and a history of repaying loans as agreed may qualify for an attractive rate slightly above the prime rate or other benchmark, while less attractive corporations can pay significantly more.

Small Business Administration Loans

One attractive option for a qualifying business is a loan guaranteed by the Small Business Administration. Rates for such loans are negotiated between the borrower and lender, but for loans of $50,000 or more, the spread between the rate quoted and the base rate can’t exceed 2.25 percent if the repayment period is shorter than seven years or 2.75 percent if the repayment period exceeds that. 

The base rate itself can be either the prime rate published in a daily national newspaper, the London Interbank One Month Prime plus 3 percent or the SBA peg rate -- a weighted average of interest rates the government pays for loans with comparable maturities. Corporations should stamp their corporate seal on the SBA Loan application form.

Shareholder Loans

A corporation can also take loans from shareholders, but the Internal Revenue Service will be watching to see what the rate is. The IRS insists that the loans be similar to what’s commercially available. If the rate is too low -- say if a business owner loaned her corporation $100,000 at 1 percent interest -- the IRS may consider that to be a capital investment in the business instead. That would require the loan repayments to be treated as dividends, which affects the owner's tax burden.