Average Business Loan Rates: What Will You Be Charged?
What will you be charged?  – Forbes Advisor

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Getting a business loan can help take your business to the next level if you do it right. One way to ensure you get the best deal is to get the lowest interest rate. We’ll help demystify business loan interest rates in this article so you can get the best loan possible for your business.

What is a business loan interest rate?

Unfortunately, lenders aren’t in the business of giving loans for free – they make money by charging interest and fees to borrowers. Interest is the amount of money, represented by a percentage, that lenders charge you to borrow money from them.

When you take out a small business loan, the total interest you pay is determined by multiplying your total loan amount, or principal, by the interest rate you are approved for. You will repay principal and interest over the term of your loan.

Due to amortization – which is the process of scheduling a fixed rate loan into equal payments – you will make the same payment throughout the life of the loan, with the first part of the payment being for interest and the amount remaining being paid out of the outstanding amount. principal of the loan. More of each payment goes towards principal and less towards interest until the loan is paid off.

Interest rate vs. APR

It’s easy to confuse the interest rate with the APR on a business loan. Although they essentially measure the same thing – the cost of borrowing – they have their differences.

The interest rate is the amount of money it will cost you to borrow money from a lender, usually expressed as an annual rate. APR, on the other hand, measures the total cost of borrowing, including fees, such as origination fees. Because the APR also includes fees in addition to interest, this figure will be higher.

When it comes to shopping around for business loans, it’s usually best to compare APRs because they include all the fees you’ll be responsible for, as opposed to the interest rate. After all, a business loan may have a low interest rate, but if it’s stacked with fees, it may not be the most affordable loan.

Related: Business Loan Calculator: Estimate Your Payments

What factors affect business loan rates?

Business loan interest rates can vary wildly. Getting the best loan rate now can impact your bottom line later. Pay attention to these factors.

  • Business Credit Score: Businesses have their own credit ratings, just like people. Lenders generally use it to measure the creditworthiness of your business.
  • Personal credit score: Lenders also consider your personal credit scores. Your own financial habits can give an indication of how you run your business and manage your finances.
  • Time spent in business: New businesses are riskier to lend than established businesses. Most lenders want to make sure you’ve been in business for at least one or two years, depending on the type of loan.
  • Industry: Some industries are more risky than others, such as restaurants. Riskier industries will generally incur higher interest rates.
  • Term of the loan: Most often, business loans with the longest terms will have the lowest interest rates. This means lenders often charge higher interest rates for short-term business loans.
  • Collateral: If you put some sort of collateral in place to secure and secure your loan, such as business equipment or a savings account, many lenders are willing to offer you a better rate on your loan. Pledging reduces the risk you pose to the lender because it gives them something of value to take back if you don’t repay your debt.
  • Type of loan: Some loan programs, such as Small Business Administration (SBA) loans, are known for their low costs. Loans from other small business lenders can come with very high rates.

All of these factors are not within your control. For example, you cannot control how long your business is active. You can only wait. Nevertheless, knowing these factors helps you decide when your business is in the best position to benefit from a favorable interest rate.

Average Interest Rates by Commercial Loan Type

Depending on your business needs, you can choose from different types of business loans. Each type has different interest rate ranges. Here’s what you can expect to pay in interest for each type of business loan:

How to compare business loan rates

Once you’ve decided on the type of business loan you need, prequalify and check your rate with as many lenders as possible. Specifically, be sure to get the APR from each lender to understand the total cost of the loan. Most lenders who offer a prequalification process will only perform a soft credit check, which has no negative impact on your credit score. Prequalification lets you see the rate and terms you can receive when you submit a formal application.

Some types of business loans, such as merchant cash advances, use factor rates instead of APRs, and you can compare the cost with that metric instead.

Other Commercial Loan Fees

In addition to the interest rate, lenders also charge other fees, including:

  • Assembly costs. This fee covers the administrative work required to process and underwrite your loan.
  • SBA Warranty Fee. This fee applies only to SBA loans and helps cover the cost of SBA programs.
  • Prepayment charges. Some lenders charge a fee if you pay off your loan before the end of the term.
  • Late payment fees. If you make a late payment, you may have to pay additional late fees.
  • Packing costs. Some SBA lenders charge these fees in addition to the guarantee fees.

Frequently Asked Questions (FAQs)

What is the difference between fixed and variable rates for business loans?

A fixed rate loan has an interest rate that stays constant until you repay the loan, whereas a variable rate can change. Variable rate business loans usually have a lower interest rate upfront, but because they can change, your payment amount and the total interest you pay over time can also change.

How do you qualify for low interest business loans?

Lenders look at many different factors when deciding what interest rate to charge you. Being in business for more than two years and having good business and personal credit ratings can help you qualify for the lowest business loan rates.

What is a good interest rate on a small business loan?

Interest rate ranges vary widely depending on the specific loan. For example, traditional bank loan rates typically range from 2% to 13%, while online loans can have rates as high as 100%. Ideally and if possible, you want to secure a rate below 10%.


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