A Guide to Business Loan Interest Rates

Understanding the Factors That Impact Business Loan Rates

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Whether you’re starting your business, expanding your business, or working to maintain your cash flow, you’ll need the funds to cover all associated costs. Business loans are a quick solution to cover expenses, but they come with an added expense in the form of interest.

It’s important to understand how interest works before you take out a loan. Different factors can impact your business loan rate, such as different interest rates. Learn the steps to getting a business loan and how to qualify for lower interest rates. 

Key Takeaways

  • Interest rates for business loans are based on a variety of factors, including credit history, the type of loan, the financial standing of the business, and the ability to repay the loan.
  • Business loan rates can either be fixed, which remain the same, or variable, which fluctuate.
  • Improving your credit score, developing a business plan, and providing collateral may help to increase your chances of approval for lower interest rates. 

How Business Loan Rates Work

Interest is the amount you pay to borrow money, or the cost of getting a loan that you repay to the lender along with the principal.

The funds borrowed from a lender incur a fee known as the interest, which is calculated with a rate that is a percentage of the money being borrowed. Interest and annual percentage rate (APR) are often used interchangeably, however APR also includes any other lender fees and charges. 

Business loan rates are determined by several different factors, including credit score, the type of loan, and the loan amount, to name a few. The lender may also have specific standards set or minimum requirements to qualify.

How Lenders Impact Rates

The interest rates on a business loan also depends on the type of lender you choose. Banks and credit unions are traditional lenders. They may offer loans with lower interest rates, but getting approved requires more work. Traditional lenders generally require higher credit scores, collateral, statements regarding business income, and overall more documentation.

If you don’t qualify for loans from traditional lenders can apply with an alternative lender as they’re generally more lenient. Alternative lenders, or online lenders, offer an easier and faster application process, though the interest rates are generally higher than traditional bank loans.

If you don’t qualify for loans through traditional and alternative lenders, you can see if you’re eligible for U.S. Small Business Administration programs. SBA works with lenders to guarantee the loan, enabling small businesses to qualify.

How To Get the Best Business Loan Rates

To get lower interest rates, you’ll need to improve your business’s financial standing. You can work on many factors that can help you to meet the standards of traditional lenders that offer the most favorable terms. 

The interest rates of traditional lenders are generally lower, between 2% and 13%, compared to alternative lenders, which could be up to 100%. You should conduct research to determine the criteria to see whether you qualify, or could potentially qualify with minor improvements. 

In general, improving your credit score lowers your rate. Keeping your utilization rate below 30% can help increase your credit score. This includes both your personal credit score and business credit score as both may be considered for small business loans.

Offering collateral may also help lower your interest rate, though this strategy carries additional risks that you may lose your property if you cannot repay the loan. Collateral is required for secured loans, as it serves to guarantee the loan, but it’s not required for unsecured loans, though a personal guarantee may be required instead. 

Factors Impacting Rates

Lenders will generally consider several factors that can impact your interest rate, such as the purpose of the loan and the business’ expected growth. Other factors may include:

  • Ability to repay the loan
  • General character and reputation
  • Debt and obligations
  • Business owner’s income and overall credentials
  • Tax returns and financial statements
  • Collateral and capital
  • Other considerations specific to the lender’s standards

If you’re trying to decide between a personal loan or a business loan, note that the interest rates are generally lower for business loans. However, the process of getting a personal loan may be easier. 

Fixed Rates vs. Variable Rates

Interest rates can either be fixed or variable. Variable rates can change depending on the market, while fixed rates stay the same throughout the period of the loan. Both variable rates and fixed rates can be beneficial, depending on the financial needs of the business.

Fixed Rates Variable Rates
Starting rate is typically higher Starting rate is typically lower
Considered lower risk due to stability Considered higher risk due to unpredictability
Rate not affected by the market Rate changes can be based on the market, or underlying benchmark rate
Monthly payments are predictable because they stay the same Monthly payments may increase or decrease

Fixed Rate Loans

Fixed-rate loans may be a better option for you if you want to know what your payments will be throughout the duration of the loan, which can help you set a budget. 

The starting rate for a fixed-rate loan is typically higher than that of a variable rate loan. But fixed-rate loans are considered lower risk because their rates won’t be affected by any changes in the market. Fixed rates can be ideal if the current rates are low or expected to increase later on, as well as for long-term business loans.

Variable Rate Loans

Variable rates, also referred to as adjustable rates, may be the ideal option if you are looking for a lower introductory rate. 

Variable interest rates may be more attractive if current rates are high and expected to decrease. Variable rates may be ideal for short-term business loans, but they are considered high risk because the changes are unpredictable.

How To Get a Business Loan

Here are a few key steps to take to get a business loan with a competitive interest rate. 

Create a Business Plan

You’ll need to create a business plan before you begin applying for business loans because many lenders require one. Business plans help the lender to understand how you plan to run your business and how the loan could improve your business.

Work To Improve Credit

Credit score plays a big role in determining whether you qualify for a loan, as well as the interest rate you qualify for. Keep track of both your business credit and personal credit history as some lenders look at both. The higher your credit score, the less risky you are and lower your interest rate.

Conduct Research

Before you choose a lender, you should research your options in loans that fit the needs of your business. Understand the lender’s criteria and see if you meet their standards before you apply.

For example, if a traditional lenders requires the owners to be in business for at least two years and your business is less than two years old, you’ll need to consider other options. You may also have certain priorities, such as getting the funds quickly. Loans may be processed faster with an alternative lender, though you’ll likely face a higher interest rate.

Necessary Documents

When you apply for a business loan, you’ll likely need to have certain financial statements and other documents handy. Not all lenders require the same documents, so this may vary depending on the lender itself. Some of the typical documents that might be required include tax returns, financial statements, bank statements, business licenses, and other documents regarding business debt.  

Frequently Asked Questions (FAQs)

How can I get a business loan if I have bad credit?

If you have bad credit, you may still be able to qualify for a loan with other factors. For example, You may provide collateral for a secured loan that is lower risk to the lender. Or, you could get a cosigner. Alternative lenders may approve borrowers who can’t qualify with traditional lenders, though their rates will likely be higher to make up for the risk.  

How much can I borrow through a business loan?

Loan amounts can vary greatly depending on your needs, the lender, and your qualifications. Business loan amounts generally range from about $5,000 to $5 million, with some as low as $500.