Average Business Loan Interest Rates (& How To Tell If You’re Getting A Good Rate)
We can talk about the terms and definitions of loans all day and night, but when you’re looking for information, the thing you probably want to see first and foremost is the loan’s interest rates.
So why are they so elusive? Because the range of rates is enormous and can vary widely from lender to lender.
Even within a single lender, your average small business loan rates may be extremely different than other merchants. But has that ever stopped Merchant Maverick from digging deep to find those loan numbers?
Here are the average business loan interest rates, and tricks you can use to get a good rate.
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Average Business Loan Interest Rate By Loan Type
The average small business loan rate can range anywhere from 3.25% – 30%, and potentially much higher.
On the low end, you have loans that are made at the prime rate and subsidized loans like Economic Injury Disaster Loans (EIDL). The former is a fluctuating rate reported by the Wall Street Journal, which itself is based on the Federal Reserve’s federal funds rate. If you have pristine credit and a good relationship with your bank, you might be able to get a prime rate loan.
The upper limit, on the other hand, will be defined by state usury laws, which vary. Additionally, certain products that resemble loans but technically aren’t loans, like merchant cash advances, aren’t regulated in the same way.
|Bank Loans||3.25% – 13%|
|Commercial Loan||3% – 11%|
|SBA Loan||2.4% – 8%|
|Non-profit Loan||3.25% – 8.5%|
|Medium-Term Loan||4% – 30%|
|Short-Term Loan||6% – 80%|
|Invoice Financing||11% – 60%|
|Equipment Financing||3.25% – 20%|
|Merchant Cash Advances||35% – 300%|
You can read more about each of these loans in our article 12 Different Types Of Small Business Loans.
What Is A Good Rate On A Business Loan?
It goes without saying that you want the lowest rates you can get, but a “good rate” can be a bit of a moving target.
If you’re looking solely at APRs, any rate that falls on the low side of the median is, relatively speaking, “good.” For example, 13% is a bad rate for a bank loan, but a pretty good rate for a short-term loan or invoice financing.
So why would you ever get anything but a bank loan? It may not be fair, but not every business can qualify for bank loans.
In other cases, businesses may need the money more quickly than they could get it from a bank, or they need to advantage of some other option offered by another lending product. In other cases, the rate may be less important than the loan-to-cost ratio (LTC). You may prefer or need to pay back the loan on a particular timetable. You may not have collateral for a secured loan. You may not want to sign a personal guarantee.
All of these factors may influence what is a good rate for your particular circumstances.
Factors That Affect Business Loan Interest Rate
If you’re shocked by the wide range in interest rates, you may wonder how and why they can vary so greatly. While APRs are a convenient shorthand for comparing loans, they don’t really explain where the costs of your loan are coming from.
Here are some of the factors that can affect the rate you pay for a loan.
This is unlikely to come as a shock to you, but your FICO or VantageScore has an impact on the rates lenders are likely to offer you. The better your credit is, the better your rate is likely to be, all else being equal. If your credit score is too low, you risk not qualifying for some loans.
That said, how much your credit rating matters can vary greatly from lender to lender. For some, it’s one of the biggest deciding factors in whether or not they lend to you. For others, it may just affect the rate you’re offered. Some won’t even check your credit. Consider your credit score and whether it’ll be a boon or a burden for the type of loan you’re seeking. If it’s the latter, look for lenders who don’t emphasize credit as heavily.
The Prime Rate
Many business loans are pegged to the market prime rate. This rate reflects the Federal Reserve’s federal funds rate, which is used to influence interest rates across the economy, along with the rates banks charge each other. At the time of publication, the prime rate is 3.25%, which represents the best theoretical rate a business (typically a commercial business) can get from a bank.
While you’re unlikely to get a loan at the prime rate, you may see interest rates for loans expressed as “prime + x%.” Even if your loan rate isn’t expressed in the form of prime, there’s a good chance the prime rate is playing a role in your APR.
Your loan’s term length is the amount of time it’s supposed to take until your account is paid in full if all goes according to plan. This period can be anywhere from a few months to over a decade.
Think of it this way: The longer it takes your lender to recoup their investment, the riskier a prospect the loan is for them. A lot more can go wrong in 10 years than 6 months. Because of this, all else being equal, as your term length gets longer, your rates tend to go up.
Time In Business
Lenders assume business loans will be repaid with business revenue. As you might guess, this means they’re interested in your ability to keep your business running over an extending period of time. Loans to businesses that have only been around a few months are considered riskier than loans to businesses that have been around for a few years.
More risk equals higher interest rates.
Related to your time in business is your business revenue. You’ve got operational costs, as well as the need to earn a profit, but are you bringing in enough money to service your debt? Lenders that don’t care as much about credit will tend to scrutinize your revenue more closely as a sign that you’re able to pay back your loan. The better your debt-to-income ratio, the less risky your loan is.
APR factors in not just the interest rate of your loan, but other costs of borrowing. This means fees. The most common of these is the origination fee, a sum that is subtracted from the amount of money the lender gives you when you successfully apply for a loan. While you’re not paying for it out of pocket, it does detract from the value of your loan which, in turn, raises your APR.
Some lenders may charge additional administrative fees, which should be factored into their APR. Late fees and other circumstantial fees, on the other hand, aren’t included in the APR.
Short-term loans and merchant cash advances don’t tend to last long enough to accumulate interest in the same way that most installment loans do. Instead, you’re charged a flat fee, which is a percentage of the amount you borrowed. This plays havoc with APR and tends to shoot it through the roof (note the possibility of triple-digit APRs for merchant cash advances).
If you do get a loan with a flat rate, you’ll want to go with one that offers prepayment incentives. That means they lower your flat fee if you pay your balance off early.
Bank loans are notoriously slow relative to the online lending market. A big part of that is that banks will more thoroughly vet applicants. This means the bank can more thoroughly assess risk and, ultimately, take on less of it.
Online lenders offer fast approval and turnaround times, which means sacrificing a certain amount of caution. For borrowers, this convenience usually comes at a premium, raising your rates.
Though unsecured loans are quite common nowadays, many loans still require collateral of some kind. Collateral is an asset you put up that will be forfeited to the lender in the event that you default on your loan. Security adds a layer of protection for lenders and, in turn, tends to lower APRs.
More On Small Business Loan Rates & Fees
Small business loans comprise an enormous range of products and services, each with its own rates and fee structures. When you have a sense of the type of loan you’re considering, you can dive into the gory details of how those loans work and what they’ll cost you.