What is the interest rate on a business loan? Current small business loan rates can start as low as 3% from conventional banks or 7% for alternative forms of financing.
Ultimately, the interest rate on a business loan will be determined by the type of loan, lender, your credit score and other factors. Finding the best business loan rates will help you finance the future growth of your small business and make worthwhile investments.
Every business has different needs, and no single loan option will be right for every business. We’re here to help you figure out small business loan rates. (We’ve done the research.)
Commercial Business Loan Rates at a Glance
Small business loan rates can be a confusing and broad topic, especially for business owners with little experience pursuing these kinds of loans. To make the subject easier to understand, it’s good to look at the various types of loan interest rates that are available.
Because different lenders offer a wide variety of business loan rates—not to mention there are different ways to communicate rates— it’s difficult to determine the typical business loan interest rate.
Here are some of the most popular business funding models on the market, along with their annual percentage rates (APR) or factor rate:
- Conventional bank loan: Starting at 3% APR
- Small Business Administration (SBA) loans: Starting at 7.25% APR
- Business line of credit: Starting at 8% APR
- Medium-term loans: Starting at 7% APR
- Invoice Financing: Starting at 1.02 factor rate
- Short-term loans: Starting at 10% APR
- Equipment financing: Starting at 8% APR
- Merchant cash advances (MCAs): Starting at 1.10 factor rate
Different from an APR, a factor rate is another way lenders add costs to the funds they provide. With invoice financing or an MCA, the cost of funding is added to your program at the very beginning, unlike interest and APR rates that annualize over time.
What Goes Into a Business Loan Rate?
Loan interest rates aren’t going to be one size fits all. After applying for a small business loan, a lender will review several factors before finalizing the loan and rate. Generally, here are some common factors that could influence your loan interest rate:
- Credit score
- Monthly revenue
- Time in business
Both your personal and business credit score will be assessed by lenders to determine business loan rates. The search for a good loan with bad credit can be frustrating, but it isn’t impossible with the right financing.
Business loans with low interest rates are often reserved for those with the strongest financial standing. The amount of time you have been in business, as well as your monthly revenue, can give lenders an idea of your needs, your ability to make payments and your commitment. Having strong collateral such as home equity or equipment can help you secure a loan.
What About SBA Loans?
Business loan rates can vary dramatically among traditional loan options, such as short-term loans or merchant cash advances. Because of the consistency and often manageable payment terms, many small business owners are looking to SBA loans, which are secured loans regulated by the SBA.
Although SBA loan rates are often lower and much easier to manage than conventional loans, it should be noted they have very strict requirements, and in many cases a difficult application process. Because of this, there may be a wait of several weeks or even months before a bank approves an SBA loan application.
On the other hand, a business owner can expect more lenient eligibility requirements and, in many cases, faster access to funding for loans with higher interest rates.
Common Hidden Fees for Small Business Loans
Small business loan interest rates aren’t the only fees you may be paying after your loan is finalized. In some cases, you might end up caught with hidden fees that leave you owing more money than you originally imagined.
Here are a number of common hidden fees that can add to the cost of your loan:
- Application fees
- Processing fees
- Prepayment fees
- Service fees
- Late payment fees
- Closing fees
- Guarantee fees
- Origination fees
Being aware of these hidden fees will help you better compare business loan rates and make the best decision for your business.
Application and processing fees can be especially burdensome, as these fees don’t guarantee you will receive a loan. In fact, you may need to pay for application and processing fees with multiple lenders before your loan is approved.
Certain fees, such as late payment fees or prepayment fees, are punitive in nature. Like processing and application fees, origination fees serve as a way to compensate for the time and effort put into assessing your application and approving your loan. Sometimes an origination fee may be taken on off the principal sum you receive on your loan.
Although many lenders will have at least one of these fees, the added cost may vary widely.
An application fee might be a lump sum payment of a couple hundred dollars or less, whereas an origination fee could result in up to 1% or 2% of your loan being removed from your principal.
Remember, simply comparing business loan interest rates won’t give you the full picture when making financing decisions.
Finding the Best Business Loan Interest Rates
When it comes to small business loan interest rates, a little bit of research and a willingness to shop around for the right lender will go a long way. After all, securing working capital for your business is a necessity for many small businesses. By staying informed, you can track down the best business loan rates to build your company.