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If you’re in search of financing to launch or grow a small business, you may find that in some situations you don’t qualify for traditional business loans. That could be because you haven’t been in business long enough or because your credit scores aren’t strong enough for lenders to be willing to lend to you.

Whatever the reason, alternative small business loans may give you an option for getting the capital you need. These loans are offered by non-bank lenders and may be open to businesses that don’t qualify for more traditional financing. They do, however, tend to have higher interest rates and fees than other lending products.

What Are Alternative Small Business Loans?

As you might guess from the name, alternative small business loans provide alternatives to more traditional financing offered through banks. These may include lending products similar to those provided by traditional banks or different products. Qualifications for these loans tend to be less stringent than, say, what’s required for SBA loans or lines of credit offered through a bank.

Because the requirements are less strict, alternative lenders take on more risk when they approve these loans. For that reason, they generally charge higher interest rates.

Recommended: Comparing Small Business Loans and Grants

10 Alternative Business Loan Types

If you don’t qualify for more traditional types of financing, like term business loans, alternative business funding offers nearly a dozen products that you might consider.

1. Business Line of Credit

Sometimes you don’t need your money all at once, in a lump sum. Having access to a line of credit allows you to borrow what you need when you need it. You pay back only what you’ve borrowed, plus the interest on that amount.

Many alternative lenders offer lines of credit. If your application is approved, you’ll be told the maximum amount of money that you can draw money against. If you borrow a portion and pay it back, you can borrow from the full line of credit amount again, up to that maximum.

For example: let’s say you’re approved for a $10,000 line of credit. You use $5,000 now and pay it back over a few months. Then later, you borrow the full $10,000, which is available because you’ve already paid back what you previously borrowed, plus interest.

2. Term Loans

If you’re having a cash flow crunch and need capital quickly, a term loan from an alternative lender can often put funds in your account the same day you’re approved.

The difference between an alternative term loan and a traditional bank term loan is that the period you have to pay back the former is usually much shorter, sometimes as little as six to 12 months. It’s a good idea to be sure you’ll be able to make the higher payments that a shorter term may require.

3. Invoice Financing and Factoring

If your business sends invoices to clients, you may be able to leverage them as collateral for financing in one of two ways. The first is invoice financing, which allows you to borrow the value of unpaid invoices to get a loan. The lender takes a percentage of the invoice value as a fee. Once you receive payment on the invoices, you pay back the loan.

The second is invoice factoring. It’s similar to invoice financing in that you can use your unpaid invoices to get access to capital. But instead of you being responsible for getting the payment from your clients, you essentially sell the invoices to the lender, usually for a percentage of what’s owed. The lender is then responsible for getting your clients to pay the invoices. When they do, you get back the remainder of what the clients owed, minus the lender’s fee.

4. Equipment Loans

Either traditional or alternative loans may in some cases require you to put up collateral like real estate, a cash deposit, or other assets. If you don’t have qualifying assets like these but need to purchase equipment like heavy machinery, a refrigerator for your restaurant, or computers, you might want to consider an equipment loan.

The equipment you’re purchasing acts as the collateral for the loan. That means that if you default on the loan, the lender could take that equipment to cover your debt.

While equipment loans can be considered alternative financing, they may still ask applicants to meet certain qualifications, which can include a minimum credit score, a minimum time in business, and/or minimum annual revenue.

5. Merchant Cash Advances

Another type of alternative funding is the merchant cash advance. If you don’t qualify for any other type of financing, this could be your best bet. Even if you don’t have good credit, you may still be eligible, since merchant cash advance loans are made based on your business’s credit card sales.

Unlike other types of loans, merchant cash advances don’t require a monthly payment on what you borrow. Instead, a percentage of your daily credit card transactions is deducted until you have paid back the loan in full.

Merchant cash advances charge what’s called a factor rate (which is different from interest rate). That fact can make it confusing to understand the true cost of one of these lending products. Here’s how to look at it. If you get an advance of $25,000 with a factor rate of 1.2, you would multiply the two numbers together to get the total cost you’ll pay back, which is $30,000, $5,000 of which is the fee. That means you’re essentially paying 20% on the loan.

6. Online Loans

Online lenders offer various types of business loans, including common term loans and lines of credit.

They typically come with less stringent requirements regarding credit score, annual revenue, and time in business. Traditional banks prefer to see two years in business. Online lenders don’t demand that. Applications are simpler; decisions come faster.

The downside: You may pay higher interest rates and be offered shorter repayment periods.

7. Short-Term Loans

Speaking of online lenders, short-term loans come online rather than through a traditional bank. In most cases, they must be paid off within six months to a year — at most, 18 months.

Short-term loans are a form of personal loan. The lender looks at daily cash flow rather than evaluating an applicant primarily on credit score and length of time in business. You could get funded in one or two days.

However, here, too, you are usually looking at a higher total loan cost. Rates and fees vary, but the APR is typically higher for short-term business loans than long-term loans. Be prepared for repayments that will be due far more frequently than monthly.

8. Business Credit Cards

A business credit card is a credit card for business rather than personal use.

Business credit cards can pay for business expenses like travel and supplies without the owner having to get a loan. They can fund large- or small-ticket items while earning rewards.

Be prepared for expensive annual fees and high APRs. Also, note that business credit cards are not legally required to provide all the legal protections that personal credit cards give users.

9. Crowdfunding

Money that flows into a business through crowdfunding is not actually a loan, as it’s not debt financing. Crowdfunding falls under the category of equity financing. You are offering shares of your company to family, friends, and acquaintances in your networks in exchange for money.

You could be pitching to venture capitalists (employees of risk capital companies who invest money in companies) or angel investors (individuals who offer their own money in exchange for a piece of the business).

Or you may not have to produce shares at all. The several types of business crowdfunding include reward-based crowdfunding, when individuals contribute to a brand’s crowdfunding campaign in exchange for a token of appreciation, and donation crowdfunding, when nothing is ever expected.

The most popular platforms for crowdfunding for businesses include Indiegogo, SeedInvest Technology, Kickstarter, Fundable, and StartEngine.

10. Microloans

Microloans for business resemble traditional bank loans–but they’re for smaller amounts. Few of them exceed $50,000. They can help business owners who have applications that haven’t been approved by traditional banks.

The SBA sponsors a small business microloan program. SBA-approved lenders offer financing up to $50,000 to qualifying companies.

Things to Know About Alternative Business Loans

As spelled out in the 10 options above, alternative business loans can be convenient, especially since you generally get your funds faster than you would with traditional choices. But the alternatives often have much higher rates.

Naturally, rates vary from one type of alternative loan to another, and from one lender to another. If the rate you’re offered seems too high, you may want to consider whether you can wait a little longer for the funds. If so, you may be able to work on building your credit or even hold off until your business has been operating long enough to help you qualify for lower rates.

Recommended: Mompreneurs: Generational Wealth and Real-Time Struggles

When to Consider Alternative Financing

Alternative business lending serves the purpose of providing financing when other avenues aren’t an option or when you can’t afford to wait for slower, more traditional routes. Otherwise, they aren’t necessarily the most ideal lending options. That’s why it’s best to explore other possible financing sources before deciding to pay more for an alternative business loan.

However, there are some situations in which it could be a good idea to take out one of these lending options. If you have a once-in-a-lifetime opportunity to grow your business, perhaps by purchasing another company or a costly piece of equipment at a great price, the added expense of the alternative loan might be worth it.

Or if you need an infusion of cash quickly (to cover payroll or other expenses, for example), and you can’t afford to wait until clients pay you, an alternative small business loan could be a good fit.
And finally, if you have a large project or order to fulfill, an alternative loan can get you the capital you need for upfront expenses. Then you may be able to pay back the loan quickly once your client pays you.

How to Qualify for Alternative Business Loans

When you’re trying to figure out how to get a business loan through an alternative channel, you may find that the process is similar in many ways to what you’d go through with a bank. You’ll generally need to provide information about your company, including how long it’s been in business and its revenues.

Alternative finance companies may or may not consider your credit score, depending on the type of loan you’re applying for. If your credit score is poor, there are poor credit business loans that look at other factors, such as your daily credit card sales or revenues, rather than your credit.

While you’re comparing small business loans and their terms, be sure to note the requirements for each. That way, you’ll know which ones you’re most likely to qualify for as well as get the best rates on.

The Takeaway

When it comes to business loan alternatives, small business owners do have choices about the type of financing they take out and the rates they pay. However, it can take some legwork to find the deals you like best.

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 are some alternatives to small business loans?

People turn to business lines of credit, business credit cards, microloans, equipment loans, and merchant cash advances if they can’t qualify for a traditional small business loan.

What exactly is an alternative finance company?

Alternative finance companies offer business owners forms of finance that are outside the traditional finance system of banks and capital markets, such as an online lender.

What are some examples of alternative lending?

Alternative lenders are usually online, private companies that offer a range of products, including business lines of credit, invoice financing, and equipment financing.

Photo credit: iStock/Andrii Dodonov

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSB-Q224-1883324-V1

When you take out a small business loan, you need to pay back the principal (the amount borrowed) plus interest, as well as fees, such as application, origination, and closing fees.

Typically, lenders will charge fees to cover the different costs associated with making and servicing your loan. Which fees may get added to your loan will depend on the lender and the type of loan you’re looking for.

Below, you’ll learn about some of the most common small business loan fees, plus tips on how to compare loans so you can make the best borrowing decision for your business.

19 Common Types of Business Loan Fees

Because fees can inflate the total cost of your loan, it’s important to find out what extras may get added before you apply for a small business loan. Lenders also need to be transparent about what each fee covers and explain any that you don’t understand.

Below are some common fees associated with business loans. Some are universal, while others are specific to certain types of business loans or situations and may not apply to your particular loan product.

1. Origination Fees

Business loan origination fees cover the costs associated with processing your small business loan application. It may be a flat fee or a percentage of the loan amount. In some cases, this fee is tacked onto the loan amount, which means you’ll pay interest on the fee.

2. Application Fees

Lenders sometimes charge a fee for processing your loan application, which means you are getting charged just to apply. This fee is owed whether or not you are approved for the loan or decide to work with that particular lender.

Fortunately, many business lenders (such as banks and online lenders) do not charge application fees. You may also be able to avoid application fees by using a loan broker.

3. Credit Report Fees

If the lender is charged a fee to pull a credit report on a borrower, they often pass that fee on to the borrower. The fee amount varies, but usually runs between $10 and $20.

4. Appraisal Fees

If you are putting up an asset as collateral, the lender will likely require an appraisal. An appraisal fee is the cost of getting a professional opinion on the value of the asset, whether it’s equipment or property. Even if what you’re purchasing with the loan is acting as collateral, it must be appraised. Banks often prefer to work with their own appraisers and will likely charge you a fee for their services.

5. Closing Fees

Most often seen with commercial mortgages, closing fees (or costs) generally refer to all the various charges for processing your loan, from origination fees to processing fees. Rather than listing them separately, some lenders may just lump them together under one fee labeled “closing costs.” To see a full breakdown of all costs, you can request an itemized list.

6. Draw Fees

A draw fee is similar to an origination fee but only applies to business lines of credit. This fee is often expressed as a percentage of any amount borrowed and only gets deducted when you’ve requested funds from your line of credit.

7. Invoice Factoring Fees

Invoice factoring is a financing method that allows businesses to sell unpaid customer invoices in their accounts. The lender pays the business a portion of each invoice, giving the business a quick infusion of cash. When the lender receives payment from the customers for the invoices, it pays the business the balance of the invoice minus their “invoice factoring fee.” This may be charged on a percentage basis, or it could be a flat fee. This is how the lender makes money on the loan.

8. Referral Fees

Loan brokers and lending platforms refer your application to multiple lenders who then compete for your business. In some cases, they might charge you a referral fee for this service. This upfront cost is not associated with the actual lender.

9. Packaging Fees

The process of putting a loan application together and making sure it is complete can be time consuming. Some brokers and lending platforms may charge you a “packaging fee” for doing this on your behalf.

10. Underwriting Fees

Business loan underwriting is a review process in which all the information submitted in a loan application is verified. An underwriter will also evaluate the loan’s potential profitability and risk on behalf of the lender. The underwriting fee pays for the underwriter’s services. Borrowers may be charged a flat fee or a percentage of the loan amount.

11. Unsuccessful Payment Fees

If you make a payment on your loan, but it bounces due to insufficient funds in your account, you may get hit with an “unsuccessful payment” or “non-sufficient funds” (or NSF) fee. Amounts vary with each lender.

While you likely don’t plan on bouncing any checks or automatic withdrawals, if one lender charges a substantially higher NSF fee than another, you may want to take it into consideration when deciding who to work with.

12. Wire Transfer Fees

When you receive a loan, the lender will typically send the money to your bank account via Automated Clearing House (ACH), which can take one to three days. The lender might, however, give you the option of wiring your funds via a bank wire transfer, which is faster. This method is also more expensive, and you will likely be required to pick up the cost.

13. Check Fees

Making loan payments by check can result in a “check processing fee.” That’s because it usually costs banks more to process check payments than automatic withdrawals. You can avoid this fee by setting up automatic payments through your checking account.

14. SBA 7(a) Loan Guarantee Fees

The Small Business Administration (SBA) promises lenders who provide SBA-backed loans that they will get 75% to 85% of the loan back, even if the borrower defaults on the loan. The SBA typically charges borrowers a 2% to 3.75% fee for offering this guarantee.

15. Monthly Administrative Fees

Some lenders charge a monthly administration or processing fee for managing the loan. Service fees are often billed monthly or according to the loan repayment schedule, and may be charged as a percentage of the payment. Some lenders, however, may charge a one-time service fee, which would be a percentage of the total loan amount.

16. Annual Fees

This fee is often associated with a business line of credit. Some lenders charge an annual fee to keep your line of credit open and active.

17. Late Payment Fees

Late payment fees are practically universal in the lending world. Some lenders charge a flat fee, while others charge a percentage of the late payment. You can avoid this fee, however, by making your payments on or before the payment due date.

18. Prepayment Fees

Lenders make their money on loans by charging interest. So, if you pay your loan off ahead of schedule, it means the lender won’t make as much in interest. To help compensate, some lenders charge a prepayment fee or penalty. Many lenders, however, do not charge prepayment fees.

19. Other Possible Fees

Below are some other possible fees you may encounter:

•  Unused line fees This could be charged if you have a line of credit available to you but don’t use it each month. It’s designed to encourage account holders to use the credit line the following month.

•  Lockbox fees This can come up if an account holder makes a payment by depositing a check into a lockbox that is provided to them by their lender.

•  Collection and overdue fees If you’re very late with a payment (called defaulting on your loan), you may see “collection and overdue fee” on top of a late payment fee. This fee pays for any additional steps the lender has to take to acquire payment.

Recommended: Hispanic Small Business Loans

Why Are All of These Fees Charged?

Lenders charge fees for a variety of reasons. In some cases, they use fees to encourage borrowers to make payments a certain way (meaning on time and/or online). In other cases, they use fees to help them recoup any amounts charged to them by other parties (such as “wire transfer fees”).

Lenders also charge fees in order to pay in-house employees for their services (such as underwriters) and to make sure a loan is profitable (as with “prepayment fees”).

Which Fees Can Be Avoided?

You can avoid late payment fees by making all of your payments on time. You can also avoid unsuccessful payment (or NSF) fees by ensuring you have the right amount of money in your bank account before making each payment.

Another way to avoid extra fees is to make your loan payments in the method preferred by your lender, such as through autopay.

Many other fees can be avoided simply by shopping around and comparing fees when you’re looking for a small business loan.

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Why Paying Attention to Fees Is Important

Fees can add a significant additional cost to your loan, so it’s important to know exactly what you will be paying on top of interest in order to get the true cost of a loan. This also enables you to compare loans apple-to-apples.

Fortunately, lenders will typically provide an annual percentage rate (APR) for their loans. The APR provides a complete picture of the annual cost of the loan to the borrower, including interest rate and fees (like origination fees and packaging fees).

A loan’s APR won’t include fees that only activate in certain circumstances (such as a late payment fee or prepayment penalty), however. Since these fees can also impact the cost of your loan and make one borrower stand out from another, it can be a good idea to ask lenders about potential additional fees up front.

Recommended: How Much Does It Cost to Start a Business

The Takeaway

If you’re thinking about getting a small business loan to launch or expand your business, it’s important to understand all the costs involved. On top of what you borrow (the principal amount), lenders charge interest, as well as fees.

Depending on the lender, the terms of the loan, and your qualifications, each loan you apply for may have a different set of fees. To make sure you’re comparing loans apples-to-apples, it’s a good idea to take a look at the APR for each loan. In addition, you may want to ask lenders when and how you will be charged additional fees not included in the APR.

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

Which business loan fees are most common?

It’s fairly common for lenders to charge a loan origination fee, underwriting fee, appraisal fee, late payment fee, prepayment fee, and on-sufficient funds fee.

Do business loan fee amounts depend on loan amount?

In many cases, yes. For example, loan origination fees, SBA Guarantee fees, administrative fees, and referral fees are often charged as a percentage of the loan amount.

Do business loans have closing costs?

Commercial mortgages, and sometimes other types of small business loans, will come with closing costs. These can include things like appraisal fees, attorney fees, and credit report fees.

What happens if you don’t keep track of business loan fees?

If you don’t keep track of business loan fees, it’s very easy to end up paying more for a loan product than you were originally prepared for.

Are business loan fees tax-deductible?

Loan fees are not tax-deductible. However, the interest you pay on a small business loan typically is tax-deductible.

Photo credit: iStock/damircudic

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSB-Q224-1869599-V1

There are nearly 5 million Hispanic-owned businesses in the U.S., making this the fastest-growing segment of U.S. small businesses, according to the U.S. Small Business Administration (SBA). Yet, despite these big numbers, Hispanic and Latinx business owners frequently face challenges accessing capital and, as a result, often can’t successfully scale their businesses.

Fortunately, a number of organizations and government agencies in the U.S. are stepping up to address this unmet need, offering loans, grants, and other financing options to Hispanic and other minority entrepreneurs. These minority business loans may have lower interest rates and be easier to qualify for than some traditional loans. Here are 18 financing options that are worth checking out.

What Qualifies as a Hispanic-Owned Business?

To qualify as a Hispanic-owned business, at least 51% of the company must be owned by people of Mexican, Puerto Rican, Cuban, or other Hispanic origin. Currently, nearly one in four new businesses are Hispanic-owned.

What Is a Minority Business Loan?

A minority business loan is a small business loan designed to provide financing options for underserved communities. While minorities are free to apply for any business loan, minority business loans may offer more competitive rates and have less stringent qualification requirements.

Groups that are considered minorities in the U.S. include African Americans, Asian Americans, Hispanic Americans, and Native Americans. Women are also considered minorities for many types of loans, as well.

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Alternative Business Loan Options for Hispanic Business Owners

The following lenders offer different types of small business loans to Hispanic and minority entrepreneurs and were chosen based on our analysis of search volume.

1. Accion

Accion is a nonprofit financial institution that invests in underserved communities and offers low-cost lending opportunities to Hispanic- and minority-owned businesses. The Accion Opportunity Fund provides loan amounts from $5,000 to $250,000 and is quick and easy to apply for online.

Accion’s offerings include working capital and equipment financing loans, open to all minority-owned businesses and women entrepreneurs.

Accion also offers online resources, events, and networking opportunities (in Spanish and English) to help minority business owners learn and grow their companies.

2. CDFI

The Community Development Financial Institutions Fund (CDFI Fund), which is part of the U.S. Treasury, gives funds to companies and organizations that help underserved people and communities. Minority business owners can reach out to local banks and nonprofit groups that have received CDFI funds to discuss and apply for low-cost business loans.

3. Camino Financial

The owners of Camino Financial were inspired to start their lending business in order to help people like their mother, who lost her Mexican restaurant business when they were children. To that end, they offer simple and affordable loans to small businesses who find it difficult to borrow through banks. Now merged with Fundation, they offer bad credit loans, secured and unsecured loans, microloans, and working capital loans up to $50,000.

4. SBA

The U.S. Small Business Administration (SBA) offers several financing programs that can help minority-owned businesses get access to the funding they need. Here are two programs you may want to check out to find a Hispanic small business loan:

Microloans

The SBA microloan program is administered by an intermediary network of nonprofit community-based lenders, rather than traditional banks. Through these lenders, the SBA aims to reach lower-income communities and minority-owned businesses that are often overlooked by traditional lenders. These loans come with low interest rates, six-year terms. and loan amounts up to $50,000.

Community Advantage Loans

The SBA’s Community Advantage loan program provides up to $350,000 in capital and is specifically designed to meet the needs of business owners in underserved communities. To qualify for an SBA community advantage loan, business owners need to have good credit and a strong business plan. However, the business’s balance sheet and amount of collateral will not affect eligibility.

5. Kiva

By offering crowdfunded loans with 0% interest, nonprofit Kiva is working to lift barriers to capital often faced by entrepreneurs from underserved communities. To apply, you need to market your Hispanic business to the community of 2.2 million individual lenders. These lenders can then choose to lend your company and you’ll have a specific period of time in which to repay them.

6. CDC Small Business Finance

CDC Small Business Finance is a nonprofit whose mission is to provide access to affordable and responsible capital to underserved entrepreneurs, including minority, veteran, and Hispanic business owners. CDC offers loan amounts up to $250,000.

If you are looking for advice to rebuild your credit, develop your business strategy, or manage financial reports, you’ll appreciate having access to small business advisors through CDC.

7. Grameen America

Grameen America strives to achieve racial and gender equity by providing microloans of up to $2,500 to female and minority business owners. As part of their program, borrowers can open free savings accounts with commercial banks and build personal credit as they pay off their microloans. Grameen also offers training and support to women who want to start businesses and rise out of poverty.

8. LEDC

The Latino Economic Development Center (LEDC) offers Hispanic small business loans of $1,000 to $250,000 that can be used to purchase equipment, expand a business, hire staff, or purchase inventory.

The three types of loans offered by the LEDC are as follows:

•  LEDC Growth Loan: Loan amounts up to $250,000 for established small businesses that have been in operation for a minimum of two years.

•  LEDC Startup Loan: Loan amounts up to $20,000 for new businesses with less than two years of business history.

•  LEDC Seed Loan: Loan amounts up to $5,000 for businesses with less than one year of experience and with plans to launch a company within three months of funding.

LEDC also offers free business advice and credit-building services, as well as a directory of latino-owned small businesses.

9. NALCAB

The National Association of Latino and Community Asset Builders (NALCAB) provides funding to a network of over 200 nonprofit organizations that serve diverse Latino communities throughout the U.S. With NALCAB support, these partner organizations offer Hispanic loans, grants, professional training, and support.

Grants for Hispanic and Latino Business Owners

Hispanic small business loans aren’t the only way for your business to get funding. There are also minority business grants that can provide capital that you don’t have to repay. These grants are offered by federal and local government agencies, corporations, and nonprofits.

10. Grants.gov

Grants.gov is the largest database of federal grant opportunities. While most grants are not specifically targeted to Hispanic small business owners, awards are available for all types of entrepreneurs, especially those focused on healthcare, U.S. defense, and environmental protection.

11. digitalundivided

digitalundivided’s BREAKTHROUGH Program (powered by JPMorgan Chase’s Advancing Black Pathways) offers $5,000 grants to Black and Hispanic women in specific areas, such as Detroit. digitalundivided also provides training and resources to help businesses understand their customers, find financing, and choose the right business model.

12. NASE

The National Association of the Self-Employed (NASE) works to provide resources for all self-employed individuals, including Hispanic business owners. They offer Growth Grants of $4,000, which can be used for a variety of business expenses, including marketing, advertising, hiring employees, and expanding facilities.

Besides access to grants, becoming a NASE member allows you to connect with experts who can advise you on subjects like finance, healthcare, strategy, law, and marketing. NASE membership also gives you access to discounts on healthcare, software, tax filing, and business travel.

13. USDA Rural Development Grants

Hispanic businesses located in rural areas that have fewer than 50 employees and less than $1 million in gross revenue may want to consider applying for a Rural Development Grant from the USDA.

Grants vary in size and can be used for a variety of projects that aid business development in rural areas, including training, technical assistance, acquisition or development of land, building construction or renovations, equipment purchases, and pollution control.

14. SBIR and STTR

The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are government grants from five different federal government agencies. These competitive grants are focused around tech and science and offer up to $2 million in capital (divided into two phases, though, so check the annual figures) to qualified small businesses.

15. Candid.org

You may be able to find funding for your Hispanic small business through Candid.org’s Foundation Directory Online, which contains information on over 299,000 grantmakers in the U.S. Access to the directory requires buying a monthly subscription, but you can cancel at any time.

16. Comcast RISE

Comcast RISE, which stands for Representation, Investment, Strength, and Empowerment, was a grant designed for businesses that were hit hardest by COVID-19 and now continues to work towards small business transition and growth. The grant is worth $5,000 and is given to small business owners hoping to expand and recover from the effects of the pandemic. Awards go to those looking to uplift their communities with a focus on diversity, inclusion, and community investment.

17. Entrepreneurial Spirit Fund by SIA Scotch

The Entrepreneurial Spirit Fund by SIA Scotch Whiskey awards $10,000 in grants to small businesses owned by people of color in the food and beverage industry. Created by Hispanic entrepreneur Carin Luna-Ostaseskis, one of SIA’s goals is to provide funding, mentorship, and community to small businesses.

18. Amber Grant

If you’re a woman entrepreneur, consider applying for the Amber Grant, named after Amber Wigdahl, who passed at the age of 19 and never got to fulfill her business dreams. Each month, at least $30,000 is given in Amber Grant money. Applying takes just a few minutes and winners are announced by the 23rd of the following month.

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Other Resources

In addition to the grants and loans, there are organizations that can provide technical assistance, training, workshops, and networking opportunities to Hispanic businesses. Below are some you may want to check out.

digitalundivided

With a focus on assisting Black female and Latinx business owners, digitalundivided offers virtual training and a fellowship program for entrepreneurs. It also offers a pre-accelerator program for tech-enabled startup founders who have already begun to build their startup, are pre-revenue, and need assistance in developing their business model, marketing, and strategy.

Minority Business Development Agency

The Minority Business Development Agency is an advocate for Hispanic and other minority-owned businesses, and offers research, conferences, and resources to help entrepreneurs. Its Enterprising Women of Color Initiative is aimed to help minority women succeed in business through various offerings.

USHCC

The United States Hispanic Chamber of Commerce actively promotes the economic growth, development, and interests of Hispanic-owned businesses. Members have access to events and business resources to support them in their growth. In addition, members get listed in the Chamber’s online Hispanic business directory.

SCORE

SCORE is a national organization that connects business owners to free mentors to help them learn and grow their companies. SCORE also offers free workshops and a robust online database of useful business content.

Tips for Getting a Business Loan

Looking for — and applying for — a business loan can feel like an overwhelming task. Here are some ways to simplify the process.

Consider Your Options

Before applying for a small business loan, it’s a good idea to take a look at your credit profile and business financials, as this will give you an idea of what type of loan you might qualify for.

If you have excellent credit, solid revenue, and have been in business at least two years, you may be able to qualify for a long-term, low-interest loan from a bank or SBA lender. If not, you may want to look into financing offered by lenders and grantmakers listed above, as well as online lenders (who often have less strict qualification requirements for loans).

Determine How Much Money You Need

To figure out how much of a loan you need to start or grow your Hispanic business, consider how you would like to use the funds from a loan, then create a detailed budget for your project, adding in some padding to account for unexpected expenses.

Recommended: Down Payment for Business Loan

Consider the Best Location for Your Business

If you haven’t yet launched your business, consider what might be the best environment for doing so. You may want to explore the best metros for minority businesses, since they may have established communities of hispanic business owners and resources to help you.

Gather All Your Paperwork

Whatever type of funding you decide to pursue, you will likely need to supply an extensive amount of information about your business in order to apply. This often includes:

•  Business EIN

•  Industry

•  Entity type

•  Business license and permits

•  Annual business revenue and profit

•  Bank account statements (personal and business)

•  Personal and business tax returns

•  Balance sheet

•  Proof of collateral

•  Accounts receivable and payable reports

•  Existing debt

•  Commercial lease

•  Purpose of the loan/grant

•  Business plan

The Takeaway

Whether you’re looking for a Hispanic small business loan, business line of credit, SBA loan, or equipment financing, you’ve got options.

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

How do I qualify for a minority business loan?

To qualify for a minority business loan, your business needs to be at least 51% minority-owned. The lender is going to look at your credit profile, your income, and how long you’ve been in business. Qualifications aren’t always as strict as with other types of business loans, but lenders will still want to see good to excellent credit scores and a solid cash flow to qualify for the best rates.

Can immigrants get small business loans?

Yes, more often than not, immigrants can get a small business loan. If you hold a green card, you’ll usually qualify for a loan from the Small Business Administration. You’ll also need to have been in operation for at least one year in order to qualify.

What kind of financing can I get as a minority business owner?

Minority business owners can get the same type of financing that non-minority business owners can receive, in addition to loans and grants targeted specifically to minorities. Small business loan options include term loans, business lines of credit, equipment financing, merchant cash advances, commercial loans, SBA loans, and more.

Do Hispanic business grants have to be repaid?

No, business grants — including Hispanic business grants — do not have to be repaid. Small business loans, on the other hand, do need to be repaid in monthly installments.

Photo credit: iStock/svetikd

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Many small businesses provide goods or services to their customers and issue invoices for payment. These invoices usually have payment terms that specify when the customer should pay, such as 30 days. However, waiting for customers to pay can create a cash flow gap for the business. They may need funds to cover immediate expenses like payroll, purchasing inventory, or paying suppliers.

One solution is invoice financing. With this alternative type of business financing, a company is able to use its unpaid invoices as collateral to obtain a loan or line of credit from a financial institution, such as a bank or a specialized lender. This allows the business to improve its cash flow while waiting for customers to make outstanding payments.

But before you sign on the dotted line, it’s essential to carefully consider the costs and terms associated with invoice financing to ensure it’s the right financial solution for your needs. Here’s a closer look at how invoice financing works, its pros and cons, plus other financing options you may want to consider.

What Is Invoice Financing?

Invoicing financing is a type of short-term small business financing where companies leverage their unpaid invoices to access immediate cash. Instead of waiting for customers to settle their bills, the business uses these outstanding invoices as security to obtain a loan or credit line. Essentially, it’s like getting an advance on money owed by customers, which can help businesses address short-term cash flow needs without having to wait for payment.

While it’s not designed for all types of businesses, invoice financing (also sometimes referred to as accounts receivable financing) can help many companies with longer billing cycles.

How Does Invoice Financing Work?

Invoice financing primarily benefits B2B companies rather than B2C companies, which generally rely on individual customers who buy products through a point-of-sale system. Instead, it’s designed to let companies borrow against outstanding invoices for customer orders.

To qualify for invoice financing, you generally need to have accounts receivable from creditworthy customers that have a history of paying invoices on time. While the lender may also look at your company’s credit and financials, they usually aren’t their main concern. A personal guarantee isn’t usually required, but check the terms of your loan just to make sure.

Some lenders allow you to finance 100% of the invoice amount, while others limit you to borrowing up to a certain percentage of your outstanding invoices. When your customer pays the invoice, you’ll pay the lender back the amount loaned plus fees and interest.

The fee structure varies depending on your loan agreement, but typically invoice financing companies charge a flat percentage (1% to 5%) of the invoice value. This percentage may be charged for every week or every month it takes your customer to pay. So if your customers are slow to pay, costs can escalate; if they default, you may end up having to cover their invoices.

You may also encounter other kinds of fees with invoice financing, depending on the lender. There may be new account and renewal fees, a minimum volume fee, and/or an early termination fee if you decide to stop using the service. It’s always a good idea to check out the full cost of financing before you sign a contract.

Example of How Invoice Financing Works

Let’s say you decide to finance a $50,000 invoice with 30-day terms. You submit this invoice to a lender as collateral. The invoice financing company approves the invoice and provides you with a cash advance of 90% of the invoice ($45,000). The lender charges a 3% fee for each month the invoice is outstanding. Your customer pays the $50,000 invoice in three weeks, so your total fee for the advance is $1,350. Once you receive the customer’s payment, you repay the lender the money you borrowed plus fees ($46,350) and keep $3,650.

Recommended: Business Cash Management, Explained

Invoice Financing vs Invoice Factoring

Invoice financing and invoice factoring are terms that are easy to confuse. While you might even see them used interchangeably, they aren’t the same thing.

Invoice factoring, also known as accounts receivable factoring, differs from invoice financing both in terms of structure and repayment process. With invoice factoring, you sell your outstanding invoices to a factoring company at a discount. The company gives you a percentage of the invoice amount up front and then assumes responsibility for collecting the full amount from your customer. Once the customer pays the invoice to the factoring company, you receive the remaining balance minus a factoring fee that is withheld by the factoring company.

If you opt for invoice factoring vs. invoice financing, your customers will likely know that you’ve outsourced this part of your business. Some businesses may prefer to keep the collection process in-house to maintain their customer relationships.

Both invoice financing and invoice factoring involve ongoing fees. Typically, the longer each invoice goes unpaid, the more you’ll be charged. That adds some uncertainty to how much you’ll actually owe.

Recommended: What Is a Business Liability?

Pros and Cons of Invoice Financing

Invoice financing can potentially help your business in a number of ways, but it also has its drawbacks.

Pros of Invoice Financing

Here’s a look at some of the advantages of using invoice financing.

•  Improved cash flow: Invoice financing provides quick access to cash, which can help businesses cover day-to-day expenses, invest in growth, or handle unexpected costs.

•  No debt: Invoice financing is not a loan, so it doesn’t add debt to your balance sheet. It’s a way to unlock the value of your invoices without taking on long-term debt.

•  Flexible: You can use invoice financing as needed, depending on your cash flow situation. There’s no requirement to finance every invoice or maintain a minimum level of financing.

•  Accessible: Invoice financing is often easier to qualify for than traditional loans since it’s primarily based on the value of your invoices and the creditworthiness of your customers.

Cons of Invoice Financing

There are, of course, some downsides to consider as well.

•  Cost: Invoice financing can be more expensive than traditional loans or lines of credit. You’ll typically pay a fee plus interest on the advanced amount.

•  Dependence on customers: Since invoice financing relies on your customers paying their invoices, you’re somewhat dependent on their payment behavior. If they pay late or default, it can affect your financing costs.

•  Not suitable for all businesses: Invoice financing works best for businesses that have a steady stream of invoices from creditworthy customers. If your business doesn’t meet these criteria, you may not be able to use invoice financing.

•  Potential for confusion with customers: If you opt for invoice factoring, some customers may be confused or concerned if they receive payment requests from a financing company instead of directly from you.

Is Invoice Financing a Good Idea?

Invoice financing can be a useful financial tool in some cases.

If your company has seasonal fluctuations, a lengthy billing cycle, or inconsistent revenues, but also has clients who reliably pay their invoices in a timely way, invoice financing may be a good way to keep a regular cash flow through the highs and lows.

If your business has less reliable clients, using funding like this could end up costing you in the long run.

Recommended: What You Should Know About Short-Term Business Loans

Alternatives to Invoice Financing

Invoice financing is far from the only type of financing out there. Here are a few other small business loan options to consider before you make a decision.

Inventory Financing

Inventory financing is short term, asset-based financing that’s used exclusively to buy the inventory or products your business sells. The loan (or credit line) is secured by the inventory or products that you’re purchasing. That means you don’t have to offer the lender any personal collateral. But if you default on the loan, the lender can repossess the inventory you purchased as payment.

Some lenders may finance 100% of the inventory value, but more typically a lender will offer somewhere between 50% and 80% of the inventory’s value.

Inventory financing can be useful before a busy season or when you experience sudden demand for your product. But like invoice financing, inventory financing typically comes with higher costs than a regular business loan. You’ll likely also need to demonstrate a high inventory turnover rate to qualify for higher loan amounts.

Merchant Cash Advance

A merchant cash advance can be better suited to businesses with B2C sales. You borrow a lump sum and then the lender automatically deducts a portion of your credit and debit card sales until the loan (plus accrued fees) is repaid.

As with invoice factoring, a factor rate is used with a merchant cash advance instead of an interest rate. Another similarity is that your sales history, rather than your credit history, is typically the most important factor in qualifying for a merchant cash advance. Generally, approval also happens pretty quickly, allowing you to get fast access to funding. Just keep in mind that the cost of borrowing is typically higher than other types of business financing.

Recommended: Recommended: Guide to Merchant Bank Accounts

Traditional Business Line of Credit

A business line of credit is a flexible type of financing that allows a small business to borrow money up to a predetermined limit and will only charge interest on the amount of money borrowed (similar to the way a credit card works). Unlike a term loan, where you receive a lump sum of money upfront, a business line of credit allows you to borrow only the amount you need, when you need it. This can be useful for managing cash flow or covering unexpected expenses.

Business lines of credit typically have variable interest rates and can be either secured or unsecured, depending on the lender and the borrower’s creditworthiness.

Traditional Term Business Loan

Term loans provide a lump sum of money that is repaid over a fixed term, typically with a fixed interest rate (which is often lower than other types of small business financing). The funds can be used for a variety of purposes, including working capital, equipment purchases, and expansion.

This is a common type of business loan offered by banks, credit unions, and online lenders. Newer businesses typically have a better chance of approval through online lenders because they typically offer more flexible qualification requirements. However, interest rates tend to be higher.

Your business’s history, annual revenue, and creditworthiness (including your personal credit) typically determine which loan terms you’ll have access to and how much you can borrow.

Recommended: A Guide to Trade Credit in Business

The Takeaway

Cash flow can be an issue for many small businesses. If your business is a good candidate for invoice financing and you need cash quickly, this type of funding may be able to help tide you over. Just keep in mind that costs can run higher than traditional banks loans and lines of credit.

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.

Photo credit: iStock/pixdeluxe

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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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:

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.

Recommended: How to Dispute a Business Credit Report

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.

Recommended: How Much Down Payment for Business Loan?

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.

Recommended: Mompreneurs: Generational Wealth and Real-Time Struggles

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 and Cons of Fixed-Rate Business Loans

Recommended: A Guide to SBA Loans

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.

Photo credit: iStock/MicroStockHub

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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