The interest rate of a business loan can vary widely and will depend on the market, the type of loan, and the lender.
On average, the annual percentage rate (APR) for a traditional bank loan ranges from 6.13% to 12.36% The APR for a business loan from an alternative or online lender, on the other hand, can run anywhere from 6% to 99%.
The actual rate that a lender will offer will also be based on your qualifications as a borrower, such as your personal and business credit score, annual revenue, debt-to-income ratio, cash flow, number of years in business, and whether or not you’re able to secure the loan with collateral.
Here’s what you need to know about business loan interest rates and how to get the best loan at the lowest cost for your business.
5 Factors That Determine Business Loan Interest Rates
Below are some of the key factors that influence interest rates on small business loans.
1. General Interest Rates
One of the biggest factors that affects what interest rate you’ll get on a small business loan is the current market rate. The current market rate is determined by the supply and demand in financial markets, central banks (such as the Federal Reserve), prevailing economic conditions, and inflation expectations.
2. Lenders
When you compare interest rates from different lenders, you’ll generally find that banks typically offer some of the lowest rates. These loans can be difficult to qualify for, however, and the application and approval process can take weeks or months to complete. Online and other alternative lenders tend to charge higher rates but have more flexible qualification criteria and are faster to fund.
3. Types of Loans
There are many types of small business loans on the market, and each has their own interest rate range. Here’s a look at the average interest rates for common types of business loans as of May 2024:
| Loan Product | Average APR |
|---|---|
| SBA loan | 11.5% to 15% |
| Traditional bank term loan | 6.13% to 12.36% |
| Online term loan | 6% to 99% |
| Invoice financing/factoring | 10% to 79% |
| Business line of credit | 10% to 99% |
| Merchant cash advance | 40% to 350% |
Bank Small Business Loans
A traditional bank term loan can be difficult to qualify for, but if you do, you’ll see they have some of the better interest rates on business loans — averaging 6.13% to 12.36% APR.
If you have strong credit and consistent revenue, have been in operation for a few years, and don’t need the funds right away, a bank or credit union may provide you with the best terms. If you’ve already established a relationship with a particular bank or credit union, say by opening a business bank account, you might want to explore their business loan options.
Online Term Loans
Average interest rates tend to run higher for business loans offered by online lenders — ranging anywhere from 6% to 99%. However, it’s typically easier to qualify for this type of business loan than it is for a bank term loan. As a result, online term loans can be a good option if your business has poor credit or hasn’t been in operation for very long. Online lenders also offer short-term loans that are not typically available from other sources.
SBA Loans
SBA loans are partially guaranteed by the U.S. Small Business Administration and issued by participating lenders, typically banks. Due to government backing, SBA loans offer businesses access to financing with more lenient credit requirements and lower down payment requirements compared to conventional bank loans. SBA loans also come with attractive rates (currently around 11.5% to 15%) and some of the best repayment periods — some as long as 25 years.
Business Lines of Credit
With a business line of credit), a company can borrow up to a certain amount of money, as needed, and use the funds for virtually any type of business expense.. As the business repays the funds, they become available to borrow again.
A line of credit can be a great option for small businesses facing frequent cash flow issues. It can also be a good thing to have in your back pocket in case of emergencies.
Advertised rates for lines of credit are almost always low, but your business’s characteristics will determine how much you’ll pay. Generally, the APR for a business line of credit can start around 10%, but they can go much higher. Like a credit card, though, you only pay interest on what you use.
Invoice Factoring
Invoice factoring is a short-term financing method that allows businesses to sell unpaid customer invoices to an invoice factoring company. You can often get up to 85% of your unpaid invoices up front. The factoring company then collects payment from your customers and gives you the remaining balance — minus fees. While these fees can be hefty — as high as 79% — invoice factoring can help a business get past difficult financial times.
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Merchant Cash Advances
A merchant cash advance (MCA) allows your business to exchange your future earnings for immediate cash. With an MCA, you receive a lump sum of cash from an MCA provider, which you pay back using a percentage of your daily sales. MCAs are typically easier to qualify for than traditional business loans, but tend to come with higher costs. Instead of interest rates, MCAs come with factor rates — often around 1.20 to 1.50.
To determine the cost of an MCA, you multiply the total amount of cash advanced to you by the factor rate. For example, If you get $20,000 and have a factor rate of 1.25, the total cost is $25,000 ($20,000 x 1.25), which includes the $20,000 advanced to you and $5,000 in fees.
Keep in mind, though, that there may be additional fees on top of the factor rate.
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4. The Business’s Finances
No matter what type of lender you work with or what type of loan you pursue, your business’s finances will likely be thoroughly studied by an underwriter when you apply for a small business loan.
Here are some things lenders typically will look at when considering whether or not to give you a loan and, if so, at what rate.
Credit Scores: Personal and Business
Each lender has its own criteria for establishing interest rates, but personal and business credit scores are usually one of the main determining factors.
If you recently launched your business and don’t have much credit history, lenders will likely look at your personal credit profile. Generally, a higher score will help you get a lower interest rate.
Lenders often require a minimum personal credit score to qualify for financing. Banks may look for scores of 680 or higher, while online lenders may accept scores in the 500s.
Lenders will also look at your business’s credit score. Instead of ranging from 300 to 850, business credit scores typically range from 1 to 100. Dun & Bradstreet’s Paydex score (one of the more commonly used scoring models) has three risk categories, as follows:
Low risk: 80-100
Moderate risk: 50-79
High risk: 0-49
If you have a “low risk” business credit score, it likely means that you pay your bills on time and maintain a healthy credit utilization ratio. If this is the case, you can expect to receive some of the best rates on small business loans.
Business Income
How much money you bring in each year can be a key factor in determining whether you will get approved for a loan, how big of a business loan you can get, and what the interest rate will be.
A business with a strong, predictable revenue stream has a good chance of getting approved for a high loan amount with a low interest rate. If you’re just starting out and your monthly revenue is still picking up steam, you may have trouble taking out certain types of business loans.
Time in Business
The amount of time you’ve been in business also impacts the interest rate a lender will offer you. If your business is new, you will likely pay more in interest, even if your cash flow is better than more established companies. The magic number many banks want to see is often two years. It’s not uncommon for a new business to fail shortly after they’ve opened, so the fact that you’re still standing after two years is a good sign to a lender.
Quantity of Collateral
Lenders often require borrowers to put up a fixed asset (like property or equipment) to secure a loan. This reduces risk for the lender because if you default on the loan, they can seize your collateral and sell it to make up for their losses.
If you’re applying for an SBA loan or bank loan, for example, lenders will want to know what kind of collateral your small business has to offer and the value of that collateral. It’s possible to get a loan without collateral, but these loans, called unsecured loans, typically come with higher interest rates.
5. Industry
Some businesses are statistically more likely to fail than others. For example, first-year failure rates tend to be higher for companies in food service, finance/insurance, real estate, and professional/technical services.
If your business is considered a risky business to lend to, you may receive a higher rate. In addition, some lenders have certain industries that they won’t lend to (such as firearms businesses) that could affect their reputation.
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Fixed vs Variable Interest Rates
When looking at loans, you may have a choice of getting a fixed or variable interest rate.
A fixed-rate loan has the same interest rate and monthly payment for the life of the loan. This means your first payment will be the same amount as your last payment.
Businesses often choose loans with fixed interest rates so they can easily budget for the payments. In addition, if interest rates are currently low, a fixed interest loan is a way to lock in that rate for the duration of the loan.
A variable-rate loan may have different payments from one month to the next. If the market fluctuates, the rate you pay could go up or down over the life of the loan.
Variable-rate loans tend to have lower rates than fixed-rate loans at the outset. For a short-term loan, a variable interest rate can end up being a good deal for the borrower. But there is some risk involved, as the rate can increase and you need to be prepared to make that higher monthly payment.
Pros and Cons of Variable-Rate Business Loans
| Pros of Variable-Rate Business Loans | Cons of Variable-Rate Business Loans |
|---|---|
| May start with a lower interest rate than a fixed-rate loan | Loan repayments increase when interest rates rise |
| When rates go down, so do your monthly payments | You won’t know the total cost of the loan until it’s paid off |
| Total cost of the loan could end up being less than a fixed-rate loan | If rates rise quickly, loan may become more expensive than a fixed-rate loan |
Pros and Cons of Fixed-Rate Business Loans
| Pros of Fixed-Rate Business Loans | Cons of Fixed-Rate Business Loans |
|---|---|
| Fixed monthly payments | May come with a higher interest rate than a variable-rate loan |
| Borrowers are protected against rising interest rates | If rates go down, you won’t benefit unless you refinance |
| You know the total cost of the loan from the very beginning | May not be ideal for short-term business loans |
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How To Compare Business Loan Rates
When comparing small business loans, you’ll want to look at more than just the interest rate. In fact, when lenders advertise only a monthly interest rate, it can be deceiving.
A monthly interest rate is simply how much interest you would be charged in one month. It doesn’t include any other charges associated with the loan, which may include one-time charges like origination and application fees, or recurring fees like a monthly service charge.
To better understand how much money you’ll actually be required to pay over the lifetime of your loan, and to make sure you’re comparing loans apples to apples, you’ll be better off comparing annual percentage rates, or APRs. An APR includes not just the interest rate but also the associated loan fees. It gives you the total annual cost of the loan, expressed as a percentage.
Business Loan Fees
Possible fees for business loans include:
• Application fee
• Processing fee
• Closing fee
• Origination fee
• Prepayment fee
• Late payment fee
• Monthly service fee
How To Calculate Total Business Loan Cost
Not all lenders use an APR when quoting the cost of their business loans. If all you see is an interest rate, you can figure out the total cost of taking out the loan by using one of the many business loan calculators available online. In order to use one of these tools, you’ll need a few pieces of information, including:
• The loan amount
• The annual interest rate
• Other fees associated with the loan (origination fees, closing costs, etc.)
• The loan term
From there, you can see the loan’s total cost as well as what your monthly payments will be.
The Takeaway
The average small business loan interest rate depends on the overall market rate, the type of loan, the lender, your business’s financials, and the industry your business is in. Overall, traditional bank loans tend to offer better rates than other loan products. However, they may not be the best fit for your business if it’s new, doesn’t have a strong or well-established credit profile, or needs financing relatively quickly.
To get the best rate on a small business loan, it’s important to shop around and compare offers, take steps to build your business credit profile, and consider using collateral to secure the loan.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
What’s the difference between a fixed and a variable business loan rate?
A fixed business loan rate remains the same throughout the term of the loan, which means your first and last payment will be the same.. A variable business interest rate, on the other hand, fluctuates based on market conditions, potentially offering lower initial rates but with the risk of increasing over time.
How do you qualify for a low business interest rate?
To qualify for a low interest rate, your business will generally need to have a good credit score, a strong cash flow, and have been in business for two years or more. Offering collateral can also lead to a lower interest rate.
What is a good interest rate on a small business loan?
A good interest rate on a business loan depends on the type of loan you’re looking to get.. For example, a good interest rate on a bank term loan might be 6% or 7%, while rates on SBA 7(a) loans currently start at 11.5% APR.
What is the minimum interest charged by business loans?
Each loan type comes with its own interest rate range. An SBA 7(a) loan of more than $50,000, for example, comes with a base interest rate (current prime rate) plus a maximum of 6.5%.
Why are SBA loan rates so high?
SBA loan rates are tied to the prime rate, which is set by the Federal Reserve. As the Fed has steadily increased the market prime rate, SBA loan rates have climbed accordingly.
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