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The interest rate of a business loan can vary widely and will depend on the type of loan and the lender. On average, however, the annual percentage rate (APR) for a traditional bank loan is around 3% to 7%. For alternative, online loans, the average APR can range anywhere from 11% to 44%.The actual rate 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, and whether or not you’re able to secure the loan with collateral.Here’s what you need to know to get the best loan at the lowest cost for your business.
What Determines Interest Rates?
Below are some of the key factors that influence small business loan rates.
The Lender
When you compare interest rates from different lenders, you’ll generally find that banks and SBA lenders typically offer some of the lowest rates. These loans can be difficult to qualify for, however, and the application and approval process can take several months to complete. When comparing small business loans from different lenders, it’s helpful to look at the APR (if available) — this number includes not just the interest rate, but also the associated loan fees. This allows you to compare loan rates apples to apples.To give you a snapshot of how interest rates can vary, here's a sampling of lenders that came from a Google search for “top business loans” in December 2021.
Lender
Loan Type
Interest Rate (as of Dec. 23, 2021)
SBA Lender
SBA 7(a) loan
5.50% to 9.75%
Bank of America
Secured small business loan
Starting at 3.50%
Fundbox
Business line of credit
Starting at 4.66%
The Type of Loan
There are many kinds of small business loans on the market, and each has their own interest rate range. Here’s a look at the historic average interest rates for common types of business loans:
Loan Product
Average Interest Rate Range
SBA Backed Loan
5.50% – 8%
Traditional Bank Term Loan
3% to 7%
Online Term Loan
11% to 44%
Invoice Financing
13% to 60%
Merchant Cash Advance
1.10 to 1.50 factor rate
Bank Small Business Loans
A traditional bank term loan can be more difficult to qualify for, but if you do, you’ll see they have some of the better interest rates on business loans — averaging 3% to 7%. If you have strong credit, successful revenue, your business has been in operation for a few years, and you don’t need the funds right away, a traditional bank or credit union may provide you with the best terms.
Online Term Loans
The interest rates tend to run higher for online term loans — averaging in the neighborhood of 11% to 44%. However, it’s typically easier to qualify for this type of business loan than it is for bank term loans or SBA loans. 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
The Small Business Administration (SBA) guarantees SBA loans, which are offered by banks it partners with to help serve small businesses. Like bank loans, SBA-backed loans come with attractive interest rates for business loans — historically in the range of 5.50% to 8%. But like bank loans, SBA loans can be difficult to qualify for. If you do, however, these loans come with some of the best repayment periods. It’s possible to get a repayment period of up to 25 years with an SBA loan.
Business Lines of Credit
With a business line of credit (LOC), a lender gives you access to a specific amount of cash, which you can draw from whenever you want and use to cover whatever expenses you need. An LOC 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 LOC are almost always low, but your business’s characteristics will determine how much you’ll pay. Historically, the APR for a business LOC can start around 11% and go much higher. You’ll only pay interest on the funds 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 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 — in the range of 13% to 60% — invoice factoring can help a business get past difficult financial times.
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 1.10 to 1.50. To determine the total 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.
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 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 your business is new and doesn’t have a strong 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 range from 1 to 100, as follows:
80-100: Good
50-79: Fair
0-49: Bad
If you have a “good” credit score, this means that you are making your payments on time and possibly in advance. If this is the case, you can expect to receive some of the best rates.
Business Income
How much money you bring in year to 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, should you default on the loan, they can seize your collateral and sell it to make up for some of the money they’ve lost. 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.
The Business's Industry
Some businesses are statistically more likely to fail than others. For example, first-year failure rates tend to be higher for companies in the food service industry, 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: Large Business Loans
Fixed vs. Variable Interest Rates
When looking at loans, you may have a choice of getting a fixed or variable interest rate. A fixed interest rate loan has the same monthly payments 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 interest 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 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.
Pros of Fixed and Pros of Variable
Pros of Fixed Interest Rate Loans
Pros of Variable Interest Rate Loans
Fixed monthly payments
May start with a lower interest rate than a fixed rate interest loan
Borrowers are protected against rising interest rates
Total cost of the loan may be less than a fixed rate loan
Know the total cost of the loan from the very beginning
When rates go down, so do your monthly payments
Cons of Fixed and Cons of Variable
Cons of Fixed Interest Rate Loans
Cons of Variable Interest Rate Loans
May be more expensive than a variable interest rate loan
If rates rise, you could pay more than you would with a fixed rate
If rates go down, fixed interest rate borrowers will pay more than their peers unless they refinance
You won’t know the total cost of the loan until it’s paid off
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. The reason: 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 loan apples-to-apples, you’ll be better off comparing the annual percentage rate, or APR.
The easiest way to figure out the total cost of taking out a small business loan is to use one of the many loan calculators available online. In order to use one of these tools, you’ll need a few pieces of information, including:
The annual interest rate you’re quoted on the business loan
Other fees associated with the loan (origination fees, closing costs, etc.)
The loan term or expected number of payments
The loan amount
The Takeaway
The average small business loan interest rate depends on the type of loan and the lender. Overall, SBA and 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 yet have a strong or well-established credit profile, or needs financing relatively quickly. If you’re interested in finding out what type of loan offers you might qualify for, Lantern by SoFi can help. With our online comparison tool, you can quickly compare rates from multiple small business lenders without any obligation and just one application.
Frequently Asked Questions
What's the difference between fixed and variable business loan rates?
How do you qualify for a low business interest rate?
What is a good interest rate on a small business loan?
What is the minimum interest charged by business loans?
Photo credit: iStock/TimArbaev
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About the Author
Lauren Ward
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
