Guide To Business Loans

6. Average Business Loan Rates: Your Guide To Interest Rates

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Business Loans Guide

Average Business Loan Rates: Your Guide To Interest Rates

Sep 06, 2022 • 10+ min read
interest rates
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      Are you looking for a business loan to help your company? Understanding current business loan interest rates and different loan types will help you pick the loan option that’s right for you. Whether you’re looking for financing to help pay for equipment upgrades or to get your new business off the ground, the average interest rates will determine how much money you can borrow. 

      The overall cost of getting a business loan can vary significantly with various loan options and a range of interest rates. How do you know which loan is right for you? The right option will depend on how soon you need the money, the interest rate you qualify for, and if your business can afford the payments. 

      According to the Federal Reserve, median interest rates increased in Q1 of 2022 by approximately 17 basis points. The median variable rate was 4.47 percent, and the median fixed rate was 4.28 percent. The Federal Reserve also noted that overall business lending was decreasing at the beginning of 2022 as well.

      How Do Interest Rates Work? 

      For those asking, “How do interest rates work?” it’s best to think of the interest rate as the cost of borrowing money from a lender. The term of your loan, the loan type (i.e., fixed or variable), and the interest rate all affect how much money the funding will cost you. However, you also need to look at other factors, including the loan term and the amortization schedule. 

      To figure out the basic interest you will pay on a loan, if you do not pay it off early, you can use the following equation: 

      Principal of the loan X  interest rate X years of term = total interest paid 

      There are several other factors that play a role in the total cost of the loan. To get a full picture of the cost of a business loan, you can request an amortization schedule from your lender or find one online. 

      Factor Rates

      Some forms of business financing, such as a cash advance, use factor rate instead of interest rate. Unlike interest rates, a factor rate is a decimal figure that applies to the original funding amount rather than the remaining balance. For example, if you were to receive a cash advance of $20,000 at a factor rate of 1.5, the total payback amount would be $30,000.

      Discount Rates

      Accounts receivable financing will use a discount rate instead of an interest rate. The discount rate is a percentage of the total value of the unpaid invoice. The total amount you end up paying will typically depend on how long it takes the customer to pay the invoice. 

      Now, let’s look at some interest rates available to small businesses today. 

      How To Find The Right Business Loan

      If you’re looking for financing for your business, you’ll want to understand which options are available. There are many different types of loans, some of which have higher standards for approval than others. For instance, traditional bank loans and Small Business Administration loans require that a business has been established for two years. 

      Here are a few types of business loans/financing that are available to businesses: 

      • General term loan: These often come with more strict approval requirements and are offered only to businesses that have been in operation for at least two years. These loans can have a variable or fixed interest rate and usually require monthly payments and a set payoff date.
      • SBA loan: Designed for more established companies, SBA loans offer funding for various projects and are backed by the Small Business Administration. As a result, their interest rates can be lower, but the approval process tends to be more extended.
      • Business Cash Advance: A Business Cash Advance provides fast access to capital, but it comes at a higher price tag. These loans are paid off using a percentage of revenue from the business.  
      • Business line of credit: This gives business owners flexibility in how they use the funds. It does not all need to be used at once and can continue to be borrowed as it’s paid off. 
      • Account receivable financing: This option provides business financing using your business’ unpaid invoices as collateral. 

      Depending on how you’ll use the money, how quickly you need the funds, and how quickly you want to pay it off, you can select a loan type that works best for you.

      Current Business Loan Rates

      Average business loan interest rates will vary based on the type of loan, credit worthiness of the business, loan term length and economic factors. Here are the current average rates: 

      Loan/Financing TypeAverage Interest Rates
      Business Line of Credit8%-60%
      Business Term Loan6%-44%
      Accounts Receivable Financing3%+ discount rate
      Business Cash Advance18%+ factor rate
      Equipment Financing7.5%-24%
      SBA Loan TypeInterest Rate
      SBA 7(a)Maximum rates depend on the loan amount. 5.75– 8.25% for variable-rate loans; 8.5– 11.5% for fixed rate
      SBA CAPLinesDepending on line limit, between Prime Rate + 2.25–4.75%
      SBA CDC/504Tied to 5 and 10-year U.S. Treasury rates; currently 4.63% for a 10-year maturity; 4.51% for a 20-year maturity
      SBA Disaster LoansAs low as 3%
      SBA Export LoansPrime + 6.5% for loans $50,000 or less; prime + 4.5% for loans over $50,000
      SBA Microloans8–13%
      SBA Loan Interest Rates

      If you’re looking for a business loan today, you should consider the varying interest rates and select which one is best for you. Your loan will be based on many factors that impact your interest rate, including your business or personal credit.

      Term Length and Interest Rates

      40% interest rate? Yikes. If the rates above are giving you a case of sticker shock, it will help to break down the difference between the total interest paid vs the interest rate. While a home mortgage will typically have lower interest rates, that loan is paid back over a period of years or decades with the total interest paid adding up over time. Many business loans are paid back in six months to a year, so even though the interest rate is higher, the total interest rate paid will be similar to a loan with a lower interest rate. 

      Loan TypeInterest %Amount FinancedTotal Interest Paid
      5 year loan8.95%$30,000$7,325
      6 month loan26%$30,000$7,800

      What Is The True Cost Of A Business Loan?

      Your interest rate is only one portion of the cost of a loan for your business. Depending on the type of loan and the lender, there may be additional fees that you’re responsible for paying. These fees may include an origination fee to process your loan application, an underwriting fee, and closing costs. There could also be an early payoff fee or a charge to refinance the loan later. It is essential to thoroughly understand the total cost of the loan by reading the loan agreement before you sign, since these other business loan fees can change the cost of your loan. 

      To understand the cost of your loan, you will want to look at the annual percentage rate, which includes the percentage rate, as well as other loan fees like origination, underwriting, and closing costs. Not all lenders will provide an APR, so to accurately compare options, make sure you understand how they calculate the percentage. 

      Fixed vs. Variable Interest Rates

      Another factor that plays a role in a business loan’s overall cost is whether it has a variable or fixed interest rate. A fixed-rate loan will have a consistent interest rate and monthly payment. It will not change over the life of the loan. Loans that are distributed in a lump sum often have a fixed rate. 

      A variable rate loan may have a lower interest rate initially, but the rate will change based on the index that fluctuates with the market. So if the underlying market increases, your variable rate will also increase. This can make it difficult to budget or anticipate payments month-to-month. 

      How To Get The Best Loan Rate For Your Business

      When looking for the best loan rate, you should look at the average APR of different loan types to decide which loan may be best for you. Depending on the type of loan you think would be best, you’ll want to explore the best lender and get ready to apply for a business loan. 

      Based on the type of loan and the lender, you’ll be required to provide business and personal information to qualify for the loan. Sometimes, the lender may also look at collateral from your business to help you get a better rate. 

      With so many different lenders and loan types, you’ll need to shop around for the best lender for your situation. Your final interest rate will depend on your credit history, time in business and business financials. Depending on how long your business has been around, the lender may look at your business credit score, individual credit score, or both. Just like when getting a loan for your personal life, understanding your credit score and making possible improvements before applying can be helpful. 

      The lender will also evaluate your business’s ability to repay the loan. Those factors, alongside the base interest rate, help determine your rate. Some online lenders may be able to get you prequalified with a soft pull on your credit  to give you an idea of your rate before you apply. 

      As you prepare to apply for a business loan, make sure you understand your company’s financial situation and your credit. This will help you find the right lender for you and understand what you may qualify for. 

      Ready To Find A Business Loan For You? 

      Finding the best interest rate, type of loan, and lender for your business is important as you look for funding. Remember that the total cost of the loan may be more than the APR and include other fees which raise the overall cost. 

      Use a business loan calculator to help you compare the different loan options and see which one will cost your business more over the life of the loan.

      Quickly Compare Loan Offers from Multiple Lenders

      Applying is free and won’t impact your credit.

      About the author
      Andrew Adams

      Andrew Strom Adams writes about business, marketing, technology, and finance for small businesses. He holds an MBA from Westminster College in Salt Lake City and a bachelor's degree in Journalism from Oklahoma Baptist University. He's helped law firms, startups, and other companies communicate more effectively. Andrew takes complex topics and distills them to help educate a company's target customers. He's based in Salt Lake City and enjoys hanging out with his two kids, enjoying the outdoors, and watching reality tv.

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