What is a Average Business Loan Interest Rate? What Are the Interest Rates by Type of Lender?

What is a Average Business Loan Interest Rate?

The average business loan interest rate can vary significantly depending on a variety of factors, including the type of loan, the borrower's creditworthiness, and prevailing economic conditions. 

As of the first quarter, data from the Federal Reserve Bank of Kansas City suggests that the average interest rates for small business term loans were approximately 7.00 percent for fixed-rate loans and 7.90 percent for variable-rate loans. However, it's important to note that these rates are subject to change, especially if the federal funds rate has risen since that time.

Here is a breakdown of typical starting interest rate ranges for various types of business loans:

1. Term Loans:

• Starting rate: 6.00%
• Maximum rate: 45.00%

2. Lines of Credit:

• Starting rate: 8.00%
• Maximum rate: 60.00%

3. SBA Loans (Small Business Administration Loans):

• Starting rate: 10.50%
• Maximum rate: 16.25%

4. Merchant Cash Advance:

• Typically expressed as a factor rate (e.g., 1.09 to 1.50 factor rate)

5. Bad Credit Business Loans:

• Starting rate: 25.00%
• Maximum rate: 75.00%+

It's important to emphasize that these are starting rates, and actual rates offered to businesses can vary significantly based on their specific circumstances. Lenders assess factors such as the borrower's credit score, the loan amount, the loan term, and the overall risk associated with the business.

What Are the Interest Rates by Type of Lender?

Interest rates for business loans can fluctuate significantly depending on the lending source. Generally, banks offer relatively lower interest rates compared to online lenders. However, it's important to note that banks primarily cater to borrowers with a lower risk profile and adhere to stringent lending requirements.

Here's an overview of the expected interest rate ranges from various types of lenders:

• Traditional Banks: Typically offer interest rates ranging from 5.50% to 10.50%.
• Online Lenders: Generally provide business loans with interest rates ranging from 6.00% to 30.00%.

What Are the Factors That Can Affect Interest Rate?

Interest rates on business loans can be influenced by a variety of factors, some of which borrowers can control and others that are beyond their control. Here's a detailed breakdown of the factors that can affect interest rates on business loans:

1. Federal Funds Rate: Borrowers have no direct control over this factor. The Federal Reserve sets the federal funds rate based on economic conditions. When the economy is strong or inflation is high, the Fed tends to raise rates, and when a recession looms, they may lower rates. Changes in the federal funds rate can impact the interest rates on new business loans. If you choose a variable interest rate, your loan's rate will fluctuate with market conditions, whereas a fixed rate remains constant.
2. Business Characteristics:

• Age: The age of your business can influence lender perceptions of risk. Older businesses are generally viewed as less risky, which can lead to lower interest rates.
• Revenue: Companies with higher revenue and strong cash flow are often considered less risky borrowers and may secure loans with lower rates.
• Industry: The industry your business operates in can affect rates. Some industries have higher failure rates, leading lenders to charge higher interest rates to compensate for the increased risk.
• Business Plan: A well-structured business plan that outlines how you'll use the loan and how you'll repay it can help convince lenders to offer better rates.
• Credit Score: Your business's credit score plays a significant role. A higher credit score makes it easier to qualify for lower interest rates.
• Personal Financial Details: Especially for young businesses, lenders may consider your personal credit score and financial stability. Strong personal credit and finances can positively impact the interest rates you're offered.

3. Lender Type:

• Traditional Lenders (Banks and Credit Unions): These institutions offer a range of loan types with varying interest rates. It's advisable to check with your current business bank, as they may offer favorable rates to existing customers.
• Online and Alternative Lenders: Online lenders often specialize in specific loan types and borrower profiles. Rates can vary significantly, with companies targeting businesses with excellent credit offering better rates, while those serving riskier borrowers may charge higher interest.

4. SBA Loans: Small Business Administration (SBA) loans are backed by the federal government and offered through both traditional and online lenders. They can be easier to qualify for if you have less-than-perfect credit and offer reasonable interest rates. However, the application process can be bureaucratic and time-consuming. The specific type of SBA loan (e.g., 7(a), 504, microloans, Community Advantage) that suits you depends on factors like your credit score, annual revenue, and the purpose of the funds.
5. Collateral:

• Secured Loans: Some lenders provide the option of secured loans, which are backed by collateral such as inventory or property. The presence of collateral reduces the lender's risk, often resulting in lower interest rates.
• Unsecured Loans: These loans do not require collateral but tend to have higher interest rates since lenders assume more risk.

How to Get the Best Business Loan Interest Rate?

Securing the best business loan interest rate is crucial for minimizing your borrowing costs and ensuring the financial health of your company. Here's a detailed guide on how to get the best business loan interest rate:

Appear as a Low-Risk Borrower:

• High Revenue: Demonstrating a strong revenue stream is key. Lenders are more inclined to offer favorable rates to businesses with consistent and robust income.
• Strong Cash Flow: Positive cash flow indicates your ability to repay the loan. A history of healthy cash flow can make lenders more confident in your ability to meet your financial obligations.
• Good Credit History: Maintain a good credit history for both your personal and business credit. This is especially vital for startups and small businesses. Pay your bills on time and keep your debt-to-income ratio low to improve your creditworthiness.

Comparison Shopping:

• Multiple Lenders: Don't settle for the first offer you receive. Shop around and compare loan offers from various lenders. Traditional banks, credit unions, online lenders, and alternative lenders may have different terms and rates.
• Prequalification Tools: Many lenders offer online prequalification tools that allow you to receive loan quotes with a soft credit pull, which doesn't impact your credit score. Utilize these tools to get initial offers without committing.
• Quote Comparison: Once you have several loan quotes, thoroughly compare them. Look at the Annual Percentage Rate (APR), loan terms, and any associated fees. A lower APR means lower overall borrowing costs.
• Negotiate: Don't hesitate to negotiate with lenders. If you have multiple offers in hand, you can use them as leverage to secure a better rate. Lenders may be willing to adjust their terms to win your business.

Consider Secured Loans:

• Secured vs. Unsecured Loans: Assess whether a secured loan is an option for your business. Secured loans are backed by collateral, which reduces the lender's risk. In return, secured loans often come with lower interest rates compared to unsecured loans. Be prepared to offer assets such as inventory, equipment, or real estate as collateral.

Loan Type Selection:

• Choose the Right Loan Type: Select a loan type that aligns with your business's needs and financial situation. Different loan products may have varying interest rates and terms. For instance, SBA loans or equipment financing may offer competitive rates for specific purposes.

Documentation and Preparation:

• Documentation: Ensure you have all the necessary documentation in order. Lenders will typically require financial statements, tax returns, business plans, and other documents. Being well-prepared can expedite the loan application process and potentially lead to better rates.

Maintain a Strong Relationship with Your Bank:

• If you have an existing business bank account, consider discussing loan options with your bank. Some banks offer preferential rates to loyal customers.

Is a Small Business Loan a Variable or Fixed Rate?

A small business loan can offer either a fixed or variable interest rate. Opting for a fixed-rate loan ensures that both the interest rate and monthly payment remain constant throughout the loan's duration, simplifying financial planning.

Lump-sum term loans typically feature fixed rates and are ideal for singular business expenses and long-term financial requirements, such as supporting significant business expansions, acquiring real estate, or consolidating existing debts.

On the other hand, variable-rate loans may start with a lower initial interest rate compared to fixed-rate options. However, these rates can fluctuate, as they are linked to an underlying index that moves with the market. Consequently, your monthly payments may vary, making budgeting more challenging.

For those in need of flexible access to funds rather than a fixed loan amount, a business line of credit often comes with a variable interest rate. This type of financing allows business owners to borrow money as needed and repay it continuously, similar to how one manages a credit card. It is particularly beneficial for those who require easy access to cash, whether for emergency funds or short-term working capital.

How Much Are Business Loan Fees?

Business loan fees can vary widely depending on several factors, including the size of the loan, the length of the repayment term, your credit score, and the specific type of business loan you are applying for. These fees are an essential aspect of the overall cost of borrowing and can significantly impact your business's financial health. Here's a breakdown of common fees associated with business loans:

• Origination Fee: This is an upfront fee charged by the lender for processing and establishing your loan. It typically covers administrative costs and can range from a percentage of the loan amount to a flat fee.
• Underwriting Fee: Underwriters assess your loan application, review supporting documents (such as financial statements, bank statements, credit reports, and tax returns), and determine the creditworthiness of your business. They may charge a fee for these services.
• Closing Costs: These fees are associated with finalizing the loan and may include charges such as a loan-packaging fee, commercial real estate appraisal fee (if applicable), or a business valuation fee.
• SBA Loan Guarantee Fee: If you are applying for a Small Business Administration (SBA) loan, you may incur a guarantee fee. This fee can range from 0% to 3.75% of the loan amount, depending on the size of the loan. Additionally, there may be annual service fees ranging from 0% to 0.55%, as determined by the SBA.

How to Compare Business Loan Rates?

To effectively compare business loan rates, utilizing the Annual Percentage Rate (APR) is highly recommended. The APR takes into account not only the interest rate but also the associated loan fees, providing a comprehensive view of the overall cost of borrowing.

It's important to note that not all lenders provide APR when disclosing the cost of their loan products. Some lenders may present a simple interest rate, which does not encompass loan fees and is typically applied on a monthly or weekly basis.

On the other hand, short-term lenders and merchant cash advance providers may employ a factor rate. This factor rate is multiplied by the loan amount to determine the total cost of funding and often results in high APRs. Factor rates usually fall within the range of 1.1 to 1.5.

To ensure an accurate understanding of the loan's cost, it is advisable to calculate these types of interest rates into an APR. This enables a more precise comparison of loan offerings from different lenders, allowing you to secure the most favorable financing arrangement for your business.

For example, let's consider a scenario where you have excellent credit and qualify for a $50,000 business loan with a five-year term and an APR of 15%. Under these terms, your monthly payments would amount to approximately $1,190, and the total interest paid over the loan's lifespan would be $21,370.

Now, let's imagine you shop around and receive a loan offer with a lower APR of 10%. In this case, your monthly payment would decrease by $128, resulting in a savings of $7,629 in total interest costs compared to the initial offer with the higher APR.