In the US, the average interest rate on business loans falls between 2.5 and 7 percent. Your specific rate depends on the product you select, though, and the Federal Reserve predicts a steady increase over time. Furthermore, the rate you receive could be higher or lower, depending on the lender you’re dealing with, your company’s financial profile, and other factors that will be discussed in this guide.
Business Loan Rates: Overview
When you apply for a business loan, the lender will issue a funding decision. If it indicates you’re approved for a loan, you’ll receive a document that outlines the terms of conditions of the financing agreement, including the monthly payment, interest rate, and annual percentage rate (APR).
The interest rate is a representation of borrowing costs, and the APR includes both the interest rate and any accompanying fees that come with the loan.
Variable vs. Fixed Rates
If you get a business loan with a variable interest rate, it could fluctuate over time depending on market conditions. This makes it challenging to budget for monthly loan payments. On the other hand, fixed-rate loans keep the same interest rate for the entire loan term and come with predictable monthly payments.
What Determines Business Loan Rates?
Lenders consider many factors when deciding what interest rate to offer you, including:
- The type of business loan you’re applying for
- The financial and credit health of your company
- Your ability to offer collateral
- The loan term you select
- The FED’s current interest rates
How Do You Calculate Business Loan Rates?
Here’s a breakdown of the factors that determine your business loan rate.
Lender Type
Business loans are offered by traditional banks, credit unions, online lenders, and FinTech companies. You’ll often find that interest rates from banks and credit unions are lower because these institutions have more stringent eligibility criteria than the rest of the crowd. Basically, they lower their risk of default through their application process, so they can offer lower rates as a result.
Loan Type
The business loan rate you receive will also depend on the type of loan you select. Keep in mind that rates are generally lower for installment loans, loan products with extended repayment periods, and those that aren’t designed to solely meet short-term cash needs. Alternatively, business loans that are payable within a short period of time tend to have higher interest rates.
Business Finances
How would you rate your company’s financial health? If you have a steady income stream and cash reserves, you have a good chance of getting a competitive interest rate, assuming you meet all the other eligibility criteria. However, you may only qualify for a steep interest rate if you’re constantly dealing with cash flow issues and barely staying afloat.
It’s also important to note that lenders may also assess your credit rating and business history to determine your eligibility and interest rate.
Collateral
Secured business loans are backed by collateral that the lender can recoup if the borrower falls behind on loan payments. If you offer an asset as collateral, you can expect to pay less in interest and possibly qualify for more funding since you’ve technically “secured” the financing through your collateral.
Repayment Length and Terms
Shorter repayment periods translate to higher monthly payments, but this isn’t always a negative thing. If you can afford the increased monthly payments, you may find a loan with shorter terms more favorable. Another upside to shorter repayment terms is that you can get out of debt faster, and you can potentially pay less in interest by choosing to streamline your financing. This isn’t always the case, though, as some lenders will give you a competitive interest rate with extended payment terms since they’ll have more time to collect interest on your loan.
What is a Good Business Loan Rate?
It depends on the business loan product you’re considering and the financial situation of your business, but you shouldn’t get too hung up on the interest rate. Instead, you should focus on what your business will look like after you’ve used the borrowed funds. If you can leverage the financing to grow your business and reach your full potential, then the interest rate plays less of a role.
However, the rate you receive should be comparable to or below the industry average for all borrowers.
Average Business Loan Rates
Below are the average interest rates for popular business loan products.
- Traditional Bank Loans: The average APR is between 2 percent and 13 percent
- SBA Loans: The average APR is between 5.5 percent and 8 percent
- Term Loans: The average APR is between 7 percent and 30 percent
- Business Line of Credit: The average APR is between10 percent and 99 percent
- Equipment Financing: The average APR is between 4 and 40 percent
- Merchant Cash Advance: The average APR is between 20 percent and 250 percent
- Invoice Financing: The average APR is between 13 percent and 60 percent
