According to data from the Federal Reserve, the average business loan interest rate ranges between 9% and 12% at traditional lenders like banks.

This doesn’t necessarily mean that the rate you’ll receive will be in between these margins. The exact amount you’ll be charged for a business loan could vary widely depending on a number of factors – such as the type of lender you work with and your own criteria.

Understanding how business loan rates and fees work can put you in a stronger position to secure affordable financing.

How Do You Calculate a Business Loan Interest Rate?

Business loan interest rates represent the cost of borrowing money. Interest rates are expressed as an annual rate, while APRs measure the total cost of borrowing, including additional charges such as origination fees.

Your own qualifications and a number of different criteria will determine your specific interest rate. Unfortunately, only some businesses can qualify for low-interest business loans

Take a look at some of the most important factors that decide your business loan interest rate.

1. Type of lender

Banks and credit unions tend to offer the lowest rates on small business loans, but they also feature rigid requirements. Online lenders and FinTech marketplaces provide more flexible financing options and are more accommodating on eligibility. However, these lenders can be a bit pricier.

2. Loan type

Each type of business financing comes with its own unique interest rate. SBA loans tend to have the lowest rates available, whereas faster financing options, like revenue-based financing, are generally on the higher side of the spectrum.

3. Your business finances

Lenders are incentivized to lend to responsible borrowers who they believe will be able to repay them in a timely manner. They’ll look into your business’s finances to determine how risky you are as a borrower, including your credit score, revenue, cash flow, and business history.

The riskier you appear, the higher the business loan interest rate you’ll receive.

4. Collateral

Lenders tend to favor business loans with collateral since it gives them extra assurance that they’ll be able to recuperate their funds. In many cases, collateral can help you qualify for a higher funding amount or even lower interest rates.

Collateral gives lenders a claim to either your business or personal assets. If you cannot make your payments for any reason, lenders can seize your assets to minimize their losses.

5. Repayment terms

In general, loans with longer repayment terms tend to feature lower monthly payments than business loans with shorter terms. However, business loans with longer terms typically cost more over the total lifetime of a loan.

You may be able to negotiate lower interest rates if you’re taking out long-term financing. However, this doesn’t mean you’ll automatically save money compared to faster financing solutions – it just means you’re getting a better value for the amount of time you’ll be in debt.

What Are the Business Loan Interest Rates in 2023?

The average business loan rate in 2023 is between 11% to 20%+. However, this figure is expected to rise over time as the Federal Reserve continues to raise rates. It’s not yet known how high interest rates will climb, though some experts have pointed to the possibility of as much as 3 percentage point rate increase.

It’s important to keep in mind that even though average business loan interest rates in 2023 start at around 11%, there’s really no limit to how high an interest rate can be on any given business loan.

It’s not unheard of for interest rates to be upwards of 100% APR on certain lending products, especially solutions with faster funding times and higher approval rates.

What Is the Average Business Loan Rate by Loan Type?

Let’s explore the current rates on business loans and other types of financing by their loan type.

  • Traditional bank loans: Prime + 2-3% APR

Banks and credit unions are attractive options for businesses because they are known for offering some of the lowest interest rates. Approval rates and banks and credit unions are some of the lowest on the market. In most cases, this type of lender will only approve borrowers with a minimum of 2 years of business history, strong credit, and an ability to offer collateral.

  • SBA loans: Prime + 2.25% to 4.75% APR

SBA loans are government-backed lending solutions with some of the lowest average business loan interest rates. They’re offered through participating lenders, including traditional banks or online lenders, and carry many benefits, including high funding amounts and flexibility.

Despite the many benefits of SBA loans, they can be difficult to be approved for. On top of the lender’s requirements, your business will also need to meet a set of SBA lending requirements.

  • Online loans: 11% to 100% APR

Online loans are offered through online lenders, fintech, and business financing marketplaces. These loans tend to be very accessible and boast better-than-average approval rates.

Funding amounts can be high, and the approval process can take up to a couple of business days – sometimes 24 hours or less. In exchange for these benefits, borrowers will have to pay higher interest rates on most financing products.

  • Revenue-Based Financing: 1.2 to 1.5 Factor Rate

Revenue-based financing is essentially an advance on a business’s daily credit card sales. Unlike traditional business loans, revenue-based financing is repaid via automatic deductions from your daily sales.

On days revenue is higher, companies will contribute more towards their debt and pay less when sales are slow. Even though it’s characterized by relatively higher interest rates, they are designed to be a short-term solution, so you won’t have to worry about being in debt for long.

  • Invoice financing: 13% to 60% APR

Invoice financing is another short-term, easily accessible financing solution designed to help businesses access working capital. Invoice financing entails your business borrowing money against the value of unpaid invoices you’ve issued to customers.

It’s designed to help mitigate temporary cash flow issues. Most invoice financing solutions are repaid quickly once your customers submit payment.

Do Small Business Loans Have Fixed or Variable Interest Rates?

Small business loans can have either fixed or variable interest rates. With fixed-rate loans, interest rates, and monthly payments remain the same throughout the duration of the loan. This helps businesses understand their future expenses and allows them to plan ahead.

Fixed-rate loans locked in at low-interest rates offer a distinct advantage to borrowers, especially if market rates increase over time. However, if you secured a fixed-rate loan at a higher interest rate, you may be able to refinance if market rates drop or your finances improve.

Most term loans typically feature fixed interest rates. These types of loans offer a lump sum of capital that can be used for major purchases, such as real estate, equipment, or debt refinancing.

With variable-rate loans, your interest rate and monthly payments may fluctuate depending on market conditions. Most variable-rate loans start with lower interest rates that rise over time. This makes it difficult for business owners to budget and plan their expenses ahead of time since their monthly payments may vary.

Business lines of credit, a type of financing that works similarly to credit cards, tend to feature fluctuating rates. Business lines of credit are ideal for ongoing expenses or when you don’t know how much capital you’ll need.

Business lines of credit also tend to be flexible and can be used to finance expansions, operating costs, emergency expenses, and more. Variable rates may add a layer of uncertainty. However, lines of credit don’t need to be repaid until the funds actually get used – making them a great reservoir of cash.

 

What Is a Good Business Loan Rate?

The average business loan rate is between 9% and 12%, but you may still be getting a good deal even if the rate you receive is slightly higher.

In most cases, a good business loan rate is assessed on a case-by-case basis. What may constitute a good loan rate for your business may not be the same for another business. Much comes down to your own credentials. For example, if your credit history is lacking or if you’re a younger business, your benchmark for a good business loan rate will be higher than for more established firms.

It’s important to keep in mind that the term of the loan has an enormous influence on the entire cost. For instance, even though merchant cash advances have higher interest rates, they’re typically repaid quickly. It’s possible that the total cost of a merchant cash advance may be equal to or even lower than a business loan with a seemingly lower rate but a longer repayment term.

It can be difficult to assess what’s a good loan rate for your business on your own. It’s much more helpful to consult with lending professionals, such as a Business Financing Advisor at National, who can walk you through market rates in real time and what’s realistic for your situation.

 

Factors That Affect Best Business Loan Rates

There are a variety of factors that influence the interest rate you receive, including

  • Your Cash Flow

The ratio of your incoming revenue to your outgoing expenses will provide lenders with a snapshot of your business’s profitability. If you have strong cash flow and can demonstrate that your business is more than capable of repaying the borrowed amount within the term, you might be able to negotiate a lower interest rate.

  • Your Industry

Lenders are picky about the industries they work with. Some will only operate within their specialty, whereas others work with businesses in all industries. Still, some sectors are riskier than others, and lenders will impose higher interest rates to mitigate their risk.

  • The State of the Economy

Poor economic conditions cause credit to tighten. We’re seeing it already in 2023, with persistent inflation, bank failures, and the possibility of a recession influencing the willingness of lenders to extend credit. If you secure a loan in a poor economy, expect a higher interest rate than you would otherwise.

  • Your Credit Score/Credibility

Your credit history is a receipt of how you’ve handled credit in the past. Lenders review this information carefully, as a history of timely payments and responsible spending is a good sign that the borrower will honor their contract. Lower credit scores are often given higher interest rates, whereas spotless credit history is a way to lower your rate.

  • Your Willingness to Offer Collateral

Offering an asset as collateral shifts the risk of a default from the lender to the borrower. If you can offer collateral, such as equipment, real estate, or your receivables, you’ll likely secure a lower interest rate.

  • Any Outstanding Loans

Lenders see businesses with multiple outstanding loans as a cash flow risk. Unless you’re new loan is used for consolidation or debt refinancing purposes, there’s an increased chance of higher interest rates or a denied application.

Remember – There’s always a better deal out there. It’s better to postpone your financing than accept terms that lead to a default, so make sure to carefully consider your contract before you sign on the dotted line.

How Much Are Business Loan Fees?

Business loan fees are additional costs of borrowing apart from interest rates. Almost every lender charges some type of business loan fee. The amount you’ll pay varies depending on the size of your loan, the type of business loan, the repayment term, and your credit score.

It’s important to work with lenders that are transparent about the business loan fees since this will give you a better understanding of your total borrowing costs. The most common types of business loan fees include:

  • Origination fees: Typically charged upfront to cover the cost of processing a small business loan.
  • Underwriting fees: These fees are associated with the costs of underwriting, which is the lender’s process for determining a borrower’s risk level. During the underwriting process, the documents you provide will be reviewed and verified – including bank statements, credit reports, and more.
  • Closing costs: These fees are associated with the costs of funding the transaction. Closing costs typically cover appraisals, legal fees, and more. They are most common in real estate transactions or business acquisitions.

SBA loan guarantee fee: SBA loans typically feature guarantee fees between 0% to 3.75% of the loan size.

How to Find the Best Business Loan Rates

The business loan rate you qualify for will ultimately boil down to your qualifications. To secure the best business loan rates, you’ll need to compare multiple offers from multiple lenders.

  • Prepare your documents ahead of time
  • Apply with multiple bank and non-bank lenders
  • Negotiate terms whenever possible
  • Never accept terms you aren’t 100% comfortable with
  • Work with a lender that can help you as you grow

We make this easy. National Business Capital is a leading FinTech marketplace that allows entrepreneurs to receive multiple financing options and select the best business loan rates from a range of personalized offers.

After filling out a simple application, our Business Financing Advisors will contact you about your qualifications and financing goals. From there, you’ll be presented with a range of financing solutions you can compare and contrast to select the most optimized fit.

Curious to learn what business loan rates you could qualify for? Get started here.

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Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advice from National Business Capital and the author. Do not rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely on this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there may be errors, omissions, or mistakes.