If you’re thinking of taking out a small business loan, the interest rate is probably the first aspect to consider because this determines what you’ll pay over the life of the loan. The average interest rate on a small business loan varies depending on various factors, including the loan type, the lender, and your qualifications as a borrower.
In this post, we’ll discuss what a good business loan interest is, the average interest rate on the most popular business loans, and where to get a reasonable interest rate on your business loan.
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How Do Interest Rates on Business Loans Work?
Lenders don’t give loans for free. Instead, they charge interest rates and fees in exchange for a loan. Interest is the amount of money, typically represented as a percentage, charged by lenders for the amount you borrow.
When you take out a small business loan, the interest rate you’ll pay over the life of the loan is determined by multiplying the total loan amount by the interest rate your lender approves you for.
Depending on the type of loan, the interest rate can either be fixed or variable. A fixed interest rate means your monthly payments will remain unchanged over the loan term. With a variable-rate loan, the interest rate fluctuates in response to the changes in the market.
What is a Good Business Loan Interest?
Several factors go into determining the business loan interest you’ll pay. Much boils down to your qualifications. For example, if your personal or business credit score is poor or your business is young, you may end up paying more in interest.
Ideally, a good business loan interest ranges from 2% to 13% for traditional banks and can go as high as 100% for online lenders.
Average Interest Rate on Most Common Types of Business Loans
As mentioned before, the average business loan interest rate varies depending on the kind of loan you’re looking to apply for. However, here’s what you can expect to pay as interest for popular types of business loans.
Traditional Bank Business Loans: 2% to 13% APR
Traditional bank loans are the most attractive financing option for small businesses because of their low-interest rates. However, getting approved for these loans is difficult due to their strict qualifications. These lenders typically approve borrowers with strong credit, collateral, and at least two years in business.
SBA Loans: 5.5% to 11.5% APR
SBA loans are government-backed loans offered through approved participating lenders, such as traditional banks and credit unions. Since these loans are partially guaranteed, they have lower interest rates, larger loan amounts, and longer repayment terms. As a result, SBA loans are the best fit for small businesses that may not otherwise qualify for traditional loans.
Small Business Term Loans: 7%+ APR
Small business term loans give you access to a lump sum of money, repayable within a specified period of time. The repayment period for term loans starts from 3 months to 10 years, and borrowers can use it for nearly every purpose.
Working Capital Loans: 16%+ APR
Small business owners borrow this type of short-term loan to finance day-to-day operations, such as covering payroll, rent, and debt payments. The interest rate on working capital loans may start at 16%, depending on the lender and the amount you borrow.
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Business Line of Credit: 7% to 25% APR
A business line of credit allows you to borrow up to a certain limit and pay interest on what you draw. It works like a credit card because once you repay the borrowed amount in full, you can borrow again. A business line of credit is ideal for businesses that require access to funds on a needed basis.
Merchant Cash Advance: 20% to 250% APR
A merchant cash advance gives you access to a lump sum of money upfront, repayable with a percentage of future business sales. This business financing option is a perfect option for businesses that accept debit and credit card payments from customers. However, MCAs tend to be very expensive, and APR can go as high as 250%.
Invoice Factoring: 13% to 60% APR
Invoice factoring is a short-term business financing where you sell some of your outstanding invoices at a discount to a third party, typically an invoice factoring company, in exchange for cash upfront. The factoring company is responsible for collecting the invoices directly from your customers. You can expect to pay anywhere between 13% to 60% interest for invoice factoring.
Equipment Financing: 4% to 40% APR
This is a loan used to purchase or lease business-related equipment. You can use the funds for almost any equipment purchase, from IT to heavy machinery and vehicles. Equipment financing attracts an APR ranging from 4% to 40%.
What Factors Affect Interest Rates on Business Loans?
Several factors influence interest rates on business loans, with the most common ones being:
Personal and Business Credit
Your personal and business credit score is one of the most popular aspects lenders look at when evaluating your eligibility for a loan. Credit history affects not only the financing options available to you but also the interest rate. Where your credit score stands currently determines what interest rate you’ll qualify for.
The type of loan you’re looking to apply for also influences the interest rate you get. Different types of loans offer different interest rates. For example, SBA loans have rates ranging from 8.5% to 11% because they’re backed by the U.S. Small Business Administration. Loans from alternative lenders may come with high rates.
A business that provides collateral tends to get better rates than those that don’t because it reduces the lender’s risk. Collateral can be any personal or business asset the lender can seize and sell to recoup the loan balance in case you default.
Time in Business
Your small business loan rate depends on how long you’ve been operating. This is because lenders look at the time in business to evaluate their lending risks. Most times, lenders are hesitant to loan to companies that have been in business for less than two years because they consider them risky. For this reason, they charge higher rates for business loans.
Loan terms impact average business loan rates. Choosing a shorter loan term attracts higher interest rates, while longer repayment terms come with lower interest rates. Although loans with longer terms may sound like a good deal, they often cost more over the life of the loan.
Other Costs and Fees
Lenders may also charge additional fees that may impact the business loan interest rate you pay. This may include origination fees, prepayment penalties, and late payment fees. Therefore, it’s a good idea to understand the true cost of your loan beforehand.
Your Relationship with Your Lender
Lenders may give lower rates to borrowers they have worked with previously. If you made on-time payments for your last loan, you might easily get approved for a second loan and negotiate a better business loan rate with your lender.
Where to Get a Good Interest Rate on Your Business Loan
If you’re shopping for a place to get a good interest rate on your business loan, Mulligan Funding has you covered. They provide access to working capital loans and small business term loans. They also have a renewal program where you may get more favorable terms if you renew with them.
Navigate Mulligan Funding’s website to request a free quote for your business financing needs.