Running a small business is hard work. Often working with smaller staffs and smaller budgets, it can be a challenge for business owners to stay afloat while also focusing on company growth. As worthwhile as certain investments may seem, it’s not always possible for small businesses to come up with the capital they require without outside help.
Fortunately, your small business has financing options available to help reach its full potential. It can be challenging, though, to find the best small business loan rates. Every business has different needs, and no loan option will be right for every business. It’s for this reason that we’ve done all the research for you when it comes to figuring out small business loans rates. Let’s dig in.
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 more digestible and easier to understand, it is good to look at the various types of loan interest rates that are available.
Here are some of the most popular business funding models on the market, along with their annual percentage rates or APR:
- Traditional Bank Loan: 3% to 6% APR
- Small Business Administration (SBA) Loans: 7.5% to 10% APR
- Business Line of Credit: 8% to 36% APR
- Medium-Term Loans: 7% to 30% APR
- Invoice Financing: 13% to 60% APR
- Short Term Loans: 10% to 80% APR
- Equipment Financing: 8% to 30% APR
- Merchant Cash Advances: 1.14 to 1.5 Factor Rate
While different from an APR, a factor rate is another way lenders add costs to the funds they provide. With a merchant cash advance, the cost of funding is added to your program at the very beginning, unlike interest and APR rates that annualize over time. You can read more about factor rates here.
Why SBA Loans?
Business loans rates can vary dramatically among traditional loan options, such as short-term loans or merchant cash advances. Due to the consistency and often manageable payment terms, many small business owners are looking to SBA loans, which are secured loans regulated by the US Small Business Administration.
In general, a business owner can expect more lenient eligibility requirements and, in many cases, faster access to funding for loans with higher interest rates. However, many small business owners are finding current business loans rates associated with traditional loans to be too high and are forgoing them for SBA loans.
Although current SBA loan rates are often lower and much easier to manage than conventional loans, it should also be noted that they have very strict requirements, and in many cases a difficult application process. Due to this, there may be a prolonged wait of several weeks or even months before a bank approves an SBA loan application.
Variable vs Fixed SBA Interest Rates
Business owners that want to apply for an SBA loan have two primary options for their interest rate: variable or fixed.
With a fixed interest rate, small business owners will pay the same interest rate for the entire duration of the loan period. One of the strongest and most obvious benefits to this structure is that the business owner will not be vulnerable to the constantly changing market.
Even if the prime interest rate rises dramatically, the loan holder will not need to worry. This can certainly help ease some of the anxiety associated with taking on debt. Additionally, many business owners find it easy and convenient to create a budget they can stick to when they know exactly what their loan payment will be on a month-to-month basis.
With a variable interest rate, the interest rate on business loans can potentially change throughout the loan period. Often, the interest rate of these loans is tied to an index that fluctuates with market changes. Average business loan interest rates could vary significantly over the course of a loan period as a result.
Although this could lead to an increase in monthly payments, they could also become smaller at times as well. In certain cases, the initial interest rate of a variable loan will be smaller than a fixed option, which may entice a business owner to go with the less “safe” option.
Ultimately, it is up to every individual business owner to decide whether a variable or fixed business loan interest rate is in the best interest of their company. Although a fixed option is often considered to be safer due to the consistency, a variable loan could potentially save a business owner money if timing and luck go their way during the loan period.
APR/APY: A Quick Explanation
Understanding small business loan interest rates might seem stressful enough already, but unfortunately, they are not the only thing needed to be considered when searching for a lender to borrow from. Before understanding the difference between APR and annual percentage yield (APY), one must first understand how compound interest works.
What Is Compound Interest?
In very basic terms, compounding is the process of earning interest based on previous interest, which is then added to a loan’s principal sum. Many lenders will use compound interest to calculate interest rates. This is an entirely different system than simple interest, in which rates are calculated by multiplying the daily interest rate by the number of days between payments.
Unfortunately, even to those who are very fiscally literate can be confused by compounding, allowing lenders to sneak in compound interest rates to their advantage when structuring a loan. Potentially, business owners could be shown current business loan interest rates without the APY reflected, leaving borrowers with a skewed perspective on the amount that they owe.
APY vs. APR
As discussed above, APR is an annual rate of interest on a loan. APY, on the other hand, considers the frequency in which interested is applied (this process is also known as intra-year compounding).
Occasionally, lenders might present business owners with only the APR of a loan, leaving said owners believing that their payments will be lower than they are. When discussing a loan with a creditor, you should always inquire about APY, and how it could affect monthly payments.
What Goes into a Loan Rate?
Loan interest rates are not going to be one size fits all. After applying for an SBA loan, a number of key factors will be assessed before a loan and rate are finalized by the lender. Generally, here are some of the most 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 poor credit can be frustrating, but it is not impossible with the right tools and mindset.
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 like home equity or equipment could also help you secure a loan.
Common Hidden Fees for Small Business Loans
Average small business loan interest rates are not the only fees you may be paying after your loan is finalized. Especially if you have a particularly sneaky lender, you might end up caught with hidden fees that leave you owing more money than you originally imagined.
Here are a few of the most 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
Application and processing fees can be especially burdensome, as these fees do not 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. In certain cases, 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. For example, 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.
Finding the Best Business Loan Interest Rates
Small business loan rates shouldn’t be a mystery. With a little knowledge on your side, you can find a small business loan or SBA loan with fees and rates that work for you. After all, securing working capital for your business is a necessity, not a privilege. As such, you need to stay informed regarding how to find loans with terms that work for you.
Ultimately, when it comes to SBA loan interest rates, a little bit of research and a willingness to shop around for the right lender will go a long way. With patience and determination, any business owner can find a loan offering the best business loan interest rates today.