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Best Small Business Loan Interest Rates

Jason Smith

Jason Smith

Senior Author

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Jason Smith

Senior Author

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Small business lending isn’t the same as it used to be. A combination of economic shifts and changes in technology have created a wave of change throughout the small business lending industry.

Contents

Background

Today, small business lending comes in many forms. Traditional sources of business loans, like banks and the SBA, are still around. But there are also new internet-based lenders. These new have a smaller capital base than traditional banks. They also have less overhead. That means more options for small businesses than ever before.

However, one thing hasn’t changed: small businesses still need access to capital to grow. Moreover, small business owners and operators want the best deal possible on business loans.

This guide will help you understand what to look for when it comes to getting the best business loans in 2018. We’ll cover average business loan rates. After that, we’ll explain how rates get set.

Interest rates aren’t the only thing you need to look at when considering a loan for your small business. That’s why we’ll also look at some of the fees you need to watch for. At this point, a business loan calculator could really help. Finally, we’ll talk about the most and least affordable small business loans and offer a few tips on how to find the best deal.

Business Loan Rates by Type

It’s hard to understand what your options are when you don’t have anything to compare them too. We’ve put together a list of the different types of loans a business can get. We’re listing these loans by APR. That’s because using APR gives a more accurate assessment of how much the loan will cost you.

Average APR for business loans in 2018 breaks down as follows:

  • SBA: 7.25% – 10%
  • Traditional Bank Loans: 4% – 6%
  • Business Line of Credit: 7.25% – 10%
  • Medium-term Loans: 7% – 30%
  • Invoice Factoring: 13% – 60%
  • Short-Term Loans: 8.5% – 80%
  • Cash Advance: 40% – 150%

As you can see, there’s a wide range of rates available on the market. Some of these financing options work better for some businesses instead of others. It’s also important to note that the different loan options have other factors business owners need to consider.

For example, an SBA loan has one of the best interest rates. But those loans can take a long time to get approved. They also have some of the strictest qualification requirements. Bank loans also have great rates, but the process to get one can last from a week to a month.

On the flipside, a merchant cash advance is incredibly expensive. But these loans are usually disbursed within 24 hours. The same goes for using invoice factoring companies. That means careful planning is required to get the best deal on a business loan.

Best Small Business Loan Interest Rates

Business Loan Rates by Lender

The previous section looked at some of the more traditional business lending options. But there are a lot more options now. Most of these come in the form of specialized websites.

These sites collect money from investors. The investors outline what their risk preferences are. The websites then use the investor’s money to give different types of loans.

These loans have a few advantages compared to traditional lending institutions. First, the application process is usually incredibly fast. Second, loan disbursement is also fast. That means your business can get capital right away. Finally, many of these sites consider more factors when determining loan worthiness than traditional lenders.

However, all of those advantages don’t come without some drawbacks. The newer lenders usually charge a higher interest rate. They also usually offer lower maximum loans than you could get from a bank. That means they fill a specific niche in the loan market. They aren’t right for every situation. But they’re better than traditional business loan options in others.

The average rate for a business loan from these lenders is:

BlueVine: 6.9% – 56%

The Business Backer: 3% – 42%

Fundation: 7.9% – 28.99%

Funding Circle: 5.5% – 27.99%

Kabbage: 20% – 80%

Lending Club: 5.9% – 25.9%

StreetShares: 7% – 35%

QuarterSpot: 23% – 52%

How Are Loan Rates Set?

There are a lot of different factors that go in to determining the exact rate on a business loan. Just as every business has different needs and requirements, every lender also has different thresholds and prerequisites.

Underwriters look at a business’s industry, business plan, projected profits, and credit score. Interest rates on small business loans are also influenced by different factors that affect the loan market, like Federal Reserve interest rates.

Some of the most common interest rate factors include:

Market Prime Rate

Loans are always influenced by the amount of money circulating in the economy. This manifests as the Market Prime Rate. The Prime Rate is the rate that banks charge their best-qualified customers. It’s influenced by the federal funds rate. That’s the rate that banks charge when they lend to each other.

The more risk a loan presents, the farther from the Prime Rate it will fall. That extra interest is the price that lenders require to take the risk of lending money to a business.

Time in Operation

Time in operation is another key element for the interest rates on small business loans. Many lenders are unwilling to lend money to a company that hasn’t been operating for at least two years. That’s because, statistically, most businesses that fail will do so in the first two years.

That means the longer your business has been operating, the more likely it is that you’ll be able to repay the loan. Moreover, a business that’s been operating for longer is more likely to have assets that can be seized to offset the risk of issuing a loan.

Loan Repayment Term

The loan repayment term is the amount of time you have to repay the loan. Loans that need to be paid back quickly, like short-term loans, generally have a higher interest rate. Loans with a longer repayment term will have lower interest rates. That’s because the lender will make more money over the long term with a smaller interest rate.

Business Financials

Lenders will also evaluate the state of your books. The most important factors are business revenue and profitability. These elements tell a lender if your business can generate enough money to repay the loan and stay in business.

Business Credit Score

Businesses have a credit score, just like individuals do. Lenders look at a business’s credit score to get an idea of how much risk they present. If your business has fallen behind on its bills, then the loan is riskier for the lender. That means they’ll charge a higher interest rate to cover the risk.

Personal Credit Score

Lenders don’t only look at your business’s credit score. They also look at the personal credit score for a small business owner. This tells them how good the business owner is at handling money. A lower personal credit score can cause a dramatic increase in the interest rates you’re offered on a business loan.

Loan Speed

Finally, lenders take into account the speed at which you need the money. Like any business, lenders operate on a supply and demand principal. There’s not a lot of money floating around for short term loans. Therefore, if you need a fast loan, for example within 24 hours, then expect to pay a much higher interest rate for the service.

Types of Interest Rates

In addition to different factors that go into determining interest rates, there are also different ways to calculate interest. Understanding the differences between these calculations is essential to ensuring your business gets the best deal possible.

Some of the most common small business loan interest rates include:

Simple Interest

Simple interest is the most basic type of interest. It’s also the most common type used by lenders. It’s expressed as a percentage of the principal of the loan. For example, 5% interest on a $100 loan would mean that you pay the lender a total of $105 when repaying the loan.

Interest rates are tied to timeframes. Interest can be calculated daily, weekly, monthly, quarterly, or annually. Most traditional lenders calculate interest on an annual basis. The formula for simple interest is:

Principal x Interest Rate x Duration of Loan in Years

This formula will tell you how much interest you’ll pay on a loan with an annual interest rate.

Compound Interest

Compound interest is more complex than simple interest. It’s also more expensive for the borrower. That’s because compound interest is based on the principal plus any accumulated interest. This can be compounded on different timeframes, including annually, monthly, weekly, or even daily.

The formula for compound interest is:

First Payment: Principal x Interest Rate

Second Payment: (Principal + Interest Earned) x Interest Rate

Third Payment: (Principal + Interest Earned) x Interest Rate

This continues over the course of your loan.

Business Loan APR

As we said before, APR is a more complete look at what a loan costs. APR is short for annual interest rate. It includes the interest rate you pay plus any fees or other costs. It also considers the repayment term on the loan.

APR is nice because it gives you an apples-to-apples comparison of different loan options. That way you can effectively see how much each option will cost you. It’s important to keep in mind that this number can be warped by different factors.

For example, the APR on a short-term loan will be very high because the interest is charged over a shorter period of time. You still might save money by using a short-term loan with a higher APR than you would with a longer-term loan with a lower APR. This number should be used to calculate how much you’ll pay for the loan in real dollars, rather than just looking at the APR.

Factor Rates for Business Loans

Factor rates are another way of expressing interest. They look a bit different than interest rates. Most factor rates go from 1.1 to 1.5. They show how much you’ll pay overall. For example, a $100,000 loan with a factor rate will cost $110,000 overall.

The key thing about factor rates is that all of the interest is charged up front when you get the loan. That means you can’t save money on interest by repaying the loan early. These types of loans are usually more expensive than other types of business loan interest rates.

Other Types of Cost Models for Business Financing

These aren’t the only ways that lenders make money from financing your small business. Different types of lenders have different calculations for their costs. These are usually used for loans that operate differently than the standard disbursement-repayment structure.

One good example of this situation is accounts receivable financing. These lenders provide money against invoices or other receivables that are owed to your business. They usually represent their interest rate as a discount rate.

A discount rate is a percentage that they charge on the face value of the amount of the loan. For example, if a business factors a $100,000 invoice on a 20% discount rate, then they’ll get $80,000.

Best Small Business Loan Interest Rates

Business Loan Fees to Watch Out For

Everyone hates fees. Unfortunately, the world of financial marketing has found that using fees is a great way to lower the interest rate a lender offers without lowering the actual cost of the loan.

That means you need to be extra careful when you’re looking at different loans. It’s also one of the reasons why it’s so important to look at APR when you’re choosing between different loan options of the same type.

Some of the most common fees that influence real interest rates for business loans are:

Application Fee

This is the fee you pay to apply for the loan. It’s usually not refundable, even if you don’t get approved for a loan. These fees are usually placed just high enough to prevent a flood of applications that aren’t likely to be improved. After all, if a business can’t afford a $100 application fee, it’s unlikely it will be able to repay a loan. Read more on how to apply for a business loan.

Origination Fee

An origination fee is the charge a lender issues to cover the time and effort they put in to processing your loan. These fees usually range from 1-2% of the principal of the loan. However, some companies may charge as much as 9-10%.

In most cases, the lender deducts the origination fee directly from the principal that they lend you. This is important to understand so you know how much of a loan to apply for. Otherwise you might find out that your loan doesn’t meet the needs that you have for the money.

Processing Fee

A processing fee is usually used if a business uses a check to make a payment on the loan. Checks are actually another type of credit. The lender needs to assume that the check will clear. That means they’re taking on extra risk. A processing fee helps cover that risk.

Prepayment Fee

Lenders are in the business of making money. They do so by charging interest. However, a business can pay less in interest if they pay off a loan early. That means the lender loses out on some of their expected profit. A prepayment fee offsets this loss.

Many lenders use a sliding scale to determine a prepayment fee. The earlier a business pays off a loan, the higher the pre-payment fee. This fee could be between 3 – 5% of the loan’s principal. That’s why you should be sure you understand all of the terms of a loan before you start making extra payments on it.

Guarantee Fee

A guarantee fee is a special type of fee that usually happens with an SBA loan. That’s because the SBA doesn’t actually issue loans. Instead, it issues loan guarantees. That means that the SBA will repay the lender should the borrower default.

Banks and lenders must pay this fee for every SBA loan they issue. Therefore, the usually pass the fee on to the borrower.

Service Fee

A service fee is used to cover the costs of the customer service elements of a lender. That includes the staff and resources needed to bill you, track your payments, answer questions, and so on.

Some lenders add a service fee to every bill, while others charge periodic service fees.

Late Payment Fee

A late payment fee is fairly standard for any financing agreement. It serves to compensate the lender for the extra burden of a late payment. That’s because when your payment is late the lender doesn’t have access to the capital they need to make more loans. It also acts as a discouragement to businesses not paying their loans on time.

Closing Fee

A closing fee can include just about anything. This is a fee you pay for closing the loan. Some lenders use it to cover the different types of fees listed above. It covers the expenses of processing a loan along with any other associated expenses.

Best 2018 Business Loan Rates for Affordability

The most important thing for anyone looking into business loan interest rates is affordability. That’s why we’ve put together a brief section on the most affordable types of loans.

These types of loans are more accessible to better-qualified borrowers. They may be harder to get. They also take more time to process compared to other lending options.

Business Loans from Bank

Bank loans have some of the lowest interest rates available. However, they are also the hardest loans to qualify for. Banks are fairly risk adverse. Business loans can be very risky for them. That’s why the range of borrowers that can get approved is very limited.  Business loans interest rates from a bank might be as low as 4%.

Business Loans from SBA

SBA loans are also incredibly affordable. They’re easier to qualify for than a traditional bank loan. The interest rates on SBA loans are low because the government guarantees part of the loan. That makes them less risky for the lender. However, it can take a long time to process an SBA loan. There’s also a lot of paperwork involved when compared to other lending options. SBA loan interest rates are typically around 7.5%

Worst 2018 Business Loan Rates for Affordability

This section goes the other way. These loans are much easier to qualify for. They also disburse funding much faster. However, that means they’re not as affordable for businesses. Instead, the business is paying for the benefit of fast processing, fast disbursement, and fewer qualifications on the loan.

Short-Term Business Lending

Short-term loans are usually defined as those with terms from 3-18 months. They’re easier to get than SBA loans or business loans from a bank. However, the rates are much higher. That means they’re good if your business faces a short-term cash crunch. They’re also good if you need capital to take advantage of an unforeseen opportunity.

The interest rates for short term business loans cover a huge range. The lender will evaluate the business’s revenue and profits when deciding on the interest rate.

Merchant Cash Advances

Merchant cash advances are a specialized loan product for retail stores. The lender gives the business an amount of cash upfront. The loan is repaid through a percentage of daily sales. This can be a good option for some merchants. But small business owners should be careful that their daily cashflow isn’t negatively affected by the repayment process. These loans are frequently offered by merchant services companies.

Find the Best Business Loan Interest Rate

The best way to find a top-notch business loan interest rate is to shop around. Make sure that you compare apples-to-apples when you’re looking at different business loan interest rate options. After all, a short-term loan and a longer loan will have dramatically different APRs, but that doesn’t necessarily tell you which one is cheaper.

Instead, be sure to compare like to like. That means comparing loans of similar term lengths and repayment structures.

You also need to take any fees into account. Be especially wary of prepayment fees, as these are not calculated into the APR of a loan.

Use the information in this guide to find the best interest rate business loan for your business, and start growing your business and generating more profit today!

FAQ

Interest Rates

Are you being charged too high on your small business loan? Get everything you need to know about small business loan interest rate in this section:

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What is a good interest rate on a business loan?

Many lenders would charge you based on the perceived risk of lending you money, so a “good” interest rate for you may be bad for others. For example, a newer business with unsteady income is likely to be charged higher than a more established business.

What are current business loan interest rates?

It depends on the loan source and the type of loan. Medium-term loans can cost you anywhere between 7 to 30 percent APR while business lines of credit, around 8 to 30 percent APR.

Which bank gives lowest interest rate for business loan?

Bank of America offers business loans with fixed interest rate starting 5.50%. However, other banks may be able to offer you a better deal if you have a record with them, so make sure to explore your options.

What is the current commercial loan rate?

Depending on the type of loan you apply for, commercial loan rates can range from 4 to 30 percent APR.

What is the APR on a business loan?

On your conventional business loan, your APR can go as low as 5.55%. This, of course, would depend on your credit worthiness, among many factors.

What is the interest rate on a small business loan?

Most lenders usually advertise the lowest or a range of the interest rate they charge, but just with all loans, it all goes down to your credit worthiness, perceived ability to pay, and loan terms.

What is market rate of interest for unsecured business loan?

According to Value Penguin, it’s currently at 4 to 6 percent APR. However, nothing is set in stone when we’re talking about loans. Other lenders may charge higher than that.

What is the highest business rate loan companies can charge?

Different types of loans and different lenders have different maximum interest rates. For example, a merchant cash advance can accrue 150% APR while SBA loans are only at a maximum of 10%.

Do banks have high interest rates for small business loans?

Banks generally have higher interest rates for all types of loans. That’s why you should consider credit unions as well.

Does all business loan have variable interest rate?

No. While there can be certain advantages to a variable interest rate when market conditions are in your favor, you do have the option to get a fixed-rate loan. Take a look at business line of credit rates for example.

Are loans to a business rated as income?

No. As the term implies, a business loan will go to your books as a loan.

Are interest rates better on a small business loan?

Compared to bigger businesses, rates on small business loans are generally higher because of the lower perceived capacity to pay.

Are small business loans on a fixed rate?

Not all are on a fixed rate. You may choose between fixed and variable rate based on what you see to be the best fitting your situation.

Are business auto loan rates lower?

Yes. As the vehicle will serve as the collateral, you will get a better deal on interest rates.

Qualifying for Loans

Getting everything prepared for your loan application is made easy by browsing the common questions about the matter below:

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How do you qualify for a small business loan?

The best way to increase your chance of approval is by increasing your business credit score and presenting a good business plan.

What documents are needed for a business loan?

Lenders may have different documentation requirements, but expect that they’ll ask for the following:

  • Bank statements for the past year
  • Business financial statements and tax returns
  • Business license and other certificates required from businesses
  • Personal financial statements and resumes of key people in the organization
  • Business plan
What are the qualifications for a business loan?

The only entity that can answer than is the lender itself. As they have different qualifications, only they can provide an accurate answer.

How do I get a business loan to start a business?

An excellent business plan proving the viability of your idea and some start funding will be of great help to you. Also consider taking out a personal loan for additional funding. If you have a low score then check out unsecured startup business loans bad credit options.

How much of a down payment do I need for a SBA loan?

For an SBA loan, you are required to provide a 5% down payment on the approved loan amount to claim your money.

Relevant Information on Small Business Loans

From borrowers’ top picks of lending source to general information on small business loans, you can find them all here.

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What is the best business loan?

There is no such thing. The best business loan can be different for different people depending on funding requirements and usage as well as credit rating.

Which bank is best for business loan?

Wells Fargo has established itself as “America’s leading small business lender,” having a variety of loan options available and a quick and easy application and approval process.

What is the average term of a business loan?

Short-term loans are usually repaid within 3 to 24 months, while SBA loans at 5 to 25 years. It all depends on the type of loan you’re applying for.

How long can you take out a business loan for?

Most of the time, the life of the loan is proportional to the loan amount. So, the higher the amount, the longer the payment period.

What is the average loan amount for a small business?

The average loan amount for SBA loans is $350,000. Unfortunately, other loan sources do not publish that data.

How much do you get for a business loan?

It depends on the need and the capacity to pay. Your best bet is to apply for the type of business loan where the amount you need falls at the lower end of range.

How long does it take to pay off a small business loan?

You will need to go directly to your lender for that as they can differ by a lot. Banks and other lending institutions usually publish this information online or you can contact them with your queries.

How many years can you finance a business loan?

You may be allowed up to 25 years to pay off your business loan. However, this is uncommon for smaller businesses that do not require that big a funding.

FAQ on Small Business Loans

Anything that we have not answered yet? You’ll find them here. Find out how much you should expect to pay on your loan as well as an SBA loan that may be able to take advantage of.

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What is a 504 loan program?

It is a type of SBA loan meant to provide funding on the purchase of fixed assets such as machinery, buildings, and real estate at low interest rates.

How much are payments on a 50000 loan?

At a variable interest rate, your monthly payment would vary, going higher or lower. The rule of thumb is, the shorter the payment period, the higher your payments are.

What are payments on a 10000 loan?

Assuming a 4-year loan term and 10 percent APR, your monthly payment will be $253.63. But as the terms of the loan change, so would your payments.

Jason Smith


Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state. 

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