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How do business loan interest rates work? Our guide breaks down interest rates, what affects them, and how to use interest rates to compare lenders.
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Before committing to a loan, small business owners should be familiar with business loan interest rates. From average interest rates to the factors that impact rates, this guide covers everything you need to know about business loan interest rates.
Table of Contents
When you borrow money from a lender, you are responsible for paying principal and interest.
The principal is the amount of money that was borrowed. Business loan interest is the fee you pay to the lender in exchange for borrowing money. A business loan interest is expressed as a percentage of the principal amount borrowed. Interest rates fluctuate based on factors like the state of the economy and borrower risk.
It’s important to understand what interest rates to expect and the additional fees that may come with a small business loan. This makes it easier to choose the best funding option for your business.
There are several factors that impact interest rates for small business loans.
Average business loan interest rates vary by factors including lender, type of loan, credit score, and age of your business. Rates also fluctuate based on economic factors. But we can use past data to get an idea of what to expect in terms of business loan interest rates.
Here are the average small business bank loan interest rates based on data from the Federal Reserve Bank of Kansas City:
| Loan Type | Average Interest Rate |
|---|---|
| Term Loan (Fixed) | 6.44% |
| Term Loan (Variable) | 7.44% |
| Line Of Credit (Fixed) | 6.22% |
| Line Of Credit (Variable) | 8.13% |
SBA loans are based on the Prime Rate plus a lender markup. What differentiates these loans is that there is a maximum rate set by the SBA. Here are the maximum interest rates for SBA loans:
| SBA Loan Type | Maximum Interest Rates |
|---|---|
| 7(a) Loans | Prime + 4.75% |
| Express Loans | Prime + 6.5% |
| CDC/504 Loans | Based on 5- and 10-year Treasury Rates |
Borrowers that work with alternative lenders will find an even wider range of rates. Note that these are just average rates — actual interest rates may be higher or lower based on the aforementioned factors.
| Loan Type | Average Interest Rate |
|---|---|
| Term Loans | 6% to 99%+ |
| Lines Of Credit | 10% to 99%+ |
| Invoice Financing | 10% to 79%+ |
| Merchant Cash Advances | 35% to 350%+ |
Business loan fees are not the same as your business loan interest rate. Loan fees are separate from your principal amount and interest rate.
Some of the fees you may encounter when applying for a business loan include:
The easiest way for you to compare business loan interest rates from different lenders is to use the Annual Percentage Rate (APR). APR is the sum of the interest rate plus any associated fees. The APR provides you with the total cost of the loan for a period of one year.
Unfortunately, not every lender is going to be upfront about APRs. You may encounter lenders that only give you the interest rate percentage that doesn’t include any fees. Ask your lender about loan fees and APR, use online APR calculators, or calculate the APR yourself to easily compare loans and understand just how much a loan might cost your business.
Understanding business loan interest rates is an essential step for any borrower. Knowing about interest rates helps you better understand the cost of borrowing, is critical for comparing loan offers, and helps you secure the funding you need for any financial situation.
But interest rates are just one piece of the business funding puzzle. Before you commit to a lender, make sure you understand how small business loans work. Understand borrowing requirements and make sure that you meet those standards to secure the best rates and lowest terms. This means gathering your documentation, checking your credit score, and possibly taking steps to improve your credit.
Once you’re ready to apply, find a lender that offers the financial products your business needs. You can start your search with Merchant Maverick’s picks for the best small business loans. Do your research, compare your options, and only commit to financing that will further your business’s chances for success. Good luck!
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