Small Business Loan Interest Rates: Your Ultimate Guide
Business Loan Rates: What You Need to Know
Business loan interest rates range from 6% for a traditional bank loan all the way up to 350% for a merchant cash advance and fall everywhere in between that range depending on the loan type and lender. SBA 7(a) loans—one of the most affordable and desirable small business loan products available—currently have loan rates ranging from 10.5% to 15.5%.
In this guide, we’ll break down the average business loan rates based on loan type, as well as explain how loan rates are determined and other fees that may contribute to your overall cost of debt—so that you have all of the information you need to decide what’s best for your business.
Rates by Loan Type
The average business loan interest rate is difficult to define because lending institutions offer a wide range of small business loan rates—and use many different ways to express these rates. Average business loan interest rates also vary based on your qualifications. The better your business’s qualifications, the more likely you are to receive lower rates.
What can often be more helpful is to see the average interest rate range for each loan type.
Here are ranges of interest rates, shown as an annual percentage rate (APR) for the most popular types of business funding:
Average Business Loan Interest Rates by Loan Type
| Loan Type | Interest Rate |
|---|---|
Bank Loans |
6% to 13%* |
SBA Loans |
10.5% to 14%* variable rate
12.5% to 15.5%* fixed rate |
Online Term Loans |
14% to 99% |
Equipment Financing |
4% to 45% |
Business Lines of Credit |
10% to 99% |
Invoice Financing |
10% to 79% |
Merchant Cash Advances |
40% to 350% |
*Ranges are interest rates.
As you can see, traditional bank loans and SBA loans offer the most affordable business loan rates. These products, however, also require the highest qualifications and are often the slowest to fund.
Generally speaking, as the interest rate increases on a business loan product, the speed of funding also increases and eligibility becomes easier.
What Determines Loan Rates?
Loan underwriters take a look at a host of factors to determine just how risky it will be to provide your business with a particular type of business loan. From this risk determination, the underwriter decides your small business loan interest rate. In short, the more risk you present, the higher your rate will be.
Here are some of the key factors that loan underwriters will consider when determining your business loan interest rate.
Prime Rate
Many business loans, particularly SBA loans and bank loans, derive their rates from the federal prime rate: the interest rate that commercial banks charge their most creditworthy customers.
The SBA and lenders use the prime rate as a floor when setting the interest rate for an individual borrower. The riskier you are as a borrower, the higher above the prime rate your business loan interest rate will be.
Personal Credit Score
Not only does the strength of your personal credit score have an impact on what financing options are available to you in the first place, but it also has a direct impact on the business loan rate you qualify for. Generally, borrowers with a credit score above 700 are granted the lowest interest rates.
In essence, your credit rating proves how responsible you are with your finances. If your score shows that you’re a top-notch borrower, lenders will feel confident that you’ll pay your loan back in full and on time—and therefore, won’t charge you as high of an interest rate.
Time in Business
A lender may also see your business as more or less risky depending on how old it is. Lenders usually consider businesses that have been around for less than two years as a risky venture. For this reason, they often charge higher business loan rates for younger businesses.
Your Business’s Financials
Lenders place a good deal of value on business revenue and profitability because the better your business is doing financially, the more likely it is that you’ll be able to pay back the lender.
Some lenders have revenue business loan requirements that you have to meet to be eligible for a loan, and the higher your business goes above that minimum, the lower your interest rate is likely to be.
Similarly, if your business is already profitable, that’s another reason for a lender to offer you a lower interest rate.
Loan Repayment Term Length
The term of your business loan may also have an impact on interest rate. Short-term loans have higher APRs, but you pay less in total interest since you’re borrowing the money for a shorter period of time. Long-term loans, on the other hand, have lower APRs, but you pay more in total interest.
Loan Type
Bank loans take a long time to fund, and they’re not easy to apply for or qualify for. You have to put together a lot of paperwork, and it can take several weeks or even months for the bank to process your loan.
But once the bank does its due diligence and finds you to be a trustworthy borrower, you’ll get lower commercial bank loan interest rates.
Non-bank lenders offer quick business loans that are easy to apply for. You can get the funding you need in days—without providing lots of information or putting up collateral for your loan. The catch is that in exchange for the ease and speed of your business loan application, lenders will charge high business loan interest rates.
Types of Loan Interest Rates
Lenders will describe the cost of a loan in a few different ways, so you’ll want to understand what each of these terms means to ensure you know what the actual cost of your loan will be—as well as that you’re getting the most affordable financing for your business.
Simple Interest Rate
The most common way that lenders quote the cost of borrowing money is with an interest rate, which is the amount that a lender charges—expressed as a percentage—on a loan’s principal.
There are two types of interest rates: simple interest rates and compound interest rates. Simple interest only takes into account the amount of money you’re borrowing, the yearly interest rate, and the term of the loan.
Here’s a formula for simple interest:
Simple Interest = Principal x Interest Rate x Duration of Loan (Years)
For example, if you have a $100,000 six-month loan with a 20% interest rate, the simple interest would be $100,000 x 0.20 x 0.5 (because it’s half a year). This brings the simple interest to a total of $10,000.
Compound Interest Rate
Compound interest is more complicated. In this case, lenders charge interest on the initial principal plus on any accumulated interest. Interest can compound daily, weekly, monthly, or annually.
Here’s the basic formula for calculating compound interest:
Principal x Interest rate = Interest for the first payment
(Principal + Interest earned) x Interest Rate = Interest for the second payment
(Principal + Interest earned) x Interest Rate = Interest for the third paymentThis formula continues for the number of payments that you have.
Annual Percentage Rates
Annual percentage rate (APR) gives you a more comprehensive look at what a loan will cost you. It’s the annual interest rate, including any fees you pay for borrowing (origination fee, application fee, closing fee, etc.). APRs also take into account the repayment term on your loan.
Converting business loan interest rates to APR is the optimal way to accurately compare rates, so it’s worth taking the time to do so.
Factor Rates
Factor rates are another way lenders quote business loan rates—and they’re a little different than typical interest rates.
A factor rate is expressed as a decimal figure—usually ranging from 1.1 to 1.5. You multiply the factor rate by the loan amount to get the total cost of your loan. For example, if you have a $100,000 loan with a 1.3 factor rate, you’ll have to pay back $130,000 in total.
The most important thing to know about factor rates: When a lender uses a factor rate, they charge all of the interest upfront when they originate your loan.
In other words, a loan that has a factor rate isn’t a truly amortizing loan. Your loan cost won’t change even if you pay back the loan early or make more than the minimum loan payment. Generally, factor rates tend to be the most expensive types of business loan interest rates and are often seen with merchant cash advances and some short-term loans from online lenders.
Fees That Affect Business Loan Rates
In addition to looking at the simple interest rate, you’ll also want to consider any and all fees a lender might charge to figure out the total cost of the debt (the APR).
Here are some of the loan fees that might contribute to your total loan cost:
Application Fee
Some lenders charge an application fee for processing your loan application. Usually, part of this fee covers the cost of a credit check. The application fee is generally not refundable, even if the lender doesn’t approve you for the loan.
Guarantee Fee
If you’re applying for an SBA loan, then you can expect to pay a guarantee fee. The lender must pay this to the SBA for every loan that it issues, and it generally passes on this fee to the borrower. This fee can range anywhere from 0% to 3.75%.
Origination Fee
Some lenders compensate for the time and effort they spend processing your loan with an origination fee, which is often charged as a percentage of your total loan amount (anywhere from 1% to 9%).
Underwriting Fee
Lenders might also quote you an underwriting fee, which covers the administrative costs of reviewing all of your documents and financials.
Prepayment Fees
A prepayment fee or prepayment penalty is a fee that some lenders charge when you pay off your loan before it’s due. This fee compensates lenders for the interest they lose out on when you repay your business loan early.
Closing Fees
Closing fees include all of the above fees and other fees that lenders may charge when processing your loan. For example, deed-recording and appraisal fees are common with commercial real estate loans.
Fundera Can Help
At the end of the day, the best thing you can do to ensure you get the most affordable business loan interest rate is to shop around. That’s where Fundera can help. Answer a few questions for us, and we can match you with small business loans you qualify for.
Meredith Wood
Meredith Wood is the founding editor of the Fundera Ledger and a GM at NerdWallet.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.