Average Business Loan Interest Rates: What to Expect in 2021
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Average business loan rates depend on a number of factors, such as business loan type, the individual lender and your personal qualifications as a borrower. In general, you could expect to see the following average range of annual percentage rates, or APRs, based on loan type:
- Traditional bank loans: 3% to 7%
- Alternative, online loans: 11% to 44% or more
However, not all business lenders use APR to communicate interest. You may come across factor rates or annual interest rates when searching for a business loan. Some lenders charge a weekly or monthly rate, which you could convert to an annual rate or APR. Continue reading to understand what type of rates are available and what factors affect the rate you may receive.
Average business loan interest rate by loan type
|Business loan type||Average interest rates|
|Traditional bank loans and lines of credit||3% to 7%|
|SBA 7(a) loans||5.5% to 11.25%|
|Online loans||11% to 44%|
|Merchant cash advances||20% to 250%|
|Invoice factoring||13% to 60%|
As you can see in the table, interest rates vary between types of business loans and lenders. Your individual business details would also affect the interest rate you’d receive. Because of the number of factors that affect interest rates, you may not want to rely solely on average rates when searching for financing. Review all aspects of a business loan, including loan size and repayment structure, in addition to cost before making a decision.
Traditional bank loans
Business loans from banks often have the lowest interest rates among all business financing products. In 2020, median rates on fixed-rate small business bank loans dropped to the lowest point since 2017. Banks also typically offer larger loans than alternative business lenders, but often have strict eligibility requirements.
For instance, you may need at least two years in business and annual revenue around $250,000 to qualify for a bank loan. Collateral may also be required to secure the loan, which could include assets such as business property, equipment or inventory.
SBA 7(a) loans
The U.S. Small Business Administration partners with financial institutions to provide loans to business owners who may not qualify for traditional financing. The SBA guarantees loans which reduces risk for lenders, making it easier to approve certain borrowers. Among several SBA loans is the 7(a) loan, the SBA’s primary lending program for small business owners. Borrowers can use 7(a) loans for a variety of expenses, such as working capital, real estate, equipment and more.
The SBA sets a limit on the amount of interest lenders may charge. SBA 7(a) loan rates are based on the prime rate, which is 3.25% as of Jan. 20, 2021. The SBA then caps the amount lenders can add to the prime rate, depending on loan amount and repayment term. Because of this cap, SBA loan rates are often competitive compared to other types of business loans.
For variable rate loans the maximum rate is:
- Loans less than seven years:
- $25,000 or less: Prime rate plus 4.25%
- $25,001 to $50,000: Prime rate plus 3.25%
- Over $50,000: Prime rate plus 2.25%
- Loans seven years or longer:
- $25,000 or less: Prime rate plus 4.75%
- $25,001 to $50,000: Prime rate plus 3.75%
- Over $50,000: Prime rate plus 2.75%
For fixed rate loans the maximum rate as of Jan. 20, 2021, is:
- $25,000 or less: 11.25%
- $25,001 to $50,000: 10.25%
- $50,000 to $250,000: 9.25%
- Greater than $250,000: 8.25%
Business lines of credit
A business line of credit from a bank may also come with low interest rates. Unlike a loan, a business line of credit allows you to make withdrawals as needed from a set amount of funding. A line of credit may be unsecured or secured with collateral, typically short-term assets like accounts receivable or inventory.
Interest only applies to the amount you actually borrow, not the credit line as a whole. Most lines are revolving, meaning the full credit amount becomes available again after you repay your debt. Business lines of credit are also available from online lenders, though interest rates may be higher, especially for an unsecured line of credit.
Online business loans are known for lenient eligibility requirements and fast turnaround times for approval and funding. However, online lenders typically charge high rates to make up for this convenience. Without extensive underwriting, online lenders take on more risk, leading to higher costs for borrowers.
Online loans often come with additional fees that affect the total cost of funding. For instance, you may pay a one-time origination fee as well as a monthly processing fee, which may not be reflected in your interest rate. Be sure to incorporate all fees and interest when reviewing the cost of online loans.
Merchant cash advances
A merchant cash advance is an alternative to a small business loan for businesses that need cash fast. Rather than lending money, merchant cash advance providers issue a lump sum of money in exchange for a portion of your business’s future receivables, typically credit card sales. The cash advance provider would take a set percentage of each sale until the advance is paid back.
The cost of a merchant cash advance is usually expressed as a factor rate, rather than an interest rate or APR. A factor rate is a decimal figure, typically between 1.1 and 1.5. You would multiply your factor rate by your cash advance amount to calculate the total cost of funding. Factor rates often convert to fairly high annual interest rates or APRs. However, the payment period for merchant cash advances may be shorter than with other loan products, as terms generally span 90 days to 18 months.
Invoice factoring is another alternative to the traditional term loan, as it involves selling your unpaid invoices in exchange for funding. A factoring company can typically advance 70% to 90% of the value of unpaid invoices. Once those invoices are paid, the factoring company would collect a fee before passing the remaining amount to you.
Invoice factoring fees may be flat, or potentially vary the longer an invoice remains unpaid. For instance, a factoring company may charge a 2% fee for the first 30 days an invoice is outstanding, adding 0.5% for every 10 days the invoice goes unpaid. Because of these varying fees, invoice factoring can be a potentially expensive funding option.
How typical business loan interest rates work
Business loan rates vary for different loan types, lenders and financing arrangements. However, there are a few variations of typical business loan interest rates that you may come across in your search for financing.
Fixed vs. variable rates
Interest rates for business loans can be flat and unchanging, or fluctuate over time.
- Fixed rates: The interest rate doesn’t change during the loan term. Fixed rates are common with standard terms loans, SBA loans and equipment loans.
- Variable rates: Interest rates are subject to change during the life of the loan. Variable rates are often associated with business lines of credit, merchant cash advances and SBA loans.
It may be easier to budget for fixed-rate loans, as your payments would be unchanging. Still, varying rates could lead to an overall lower cost of capital. Consider how fixed or variable rates would affect your business before making a decision.
Annual percentage rates (APR)
Annual percentage rate (APR) is a commonly used measurement to show the cost of financing. Business loans, credit cards, mortgages and other forms of financing use APR to express interest. An APR on a business loan would include the interest rate and fees associated with the loan.
Annual interest rates (AIR)
Annual interest rate (AIR) reflects the amount of interest owed each year on a loan. Unlike APR, AIR does not incorporate any fees that may be associated with the loan. To find AIR, you would divide the total interest by your loan amount and length of the loan term. In regard to business loans, AIR may be more helpful than APR when calculating the true cost of the loan as the balance decreases.
Unlike the rates listed above, factor rates are displayed as decimal figures, not percentages. Though not as common as APRs and AIRs, factor rates are typically associated with high-risk business lending products, such as merchant cash advances. A factor rate is not annualized, which may make it more suitable than APR for loans or cash advances with terms less than one year.
What factors impact business loan rates?
No matter what type of interest rate a lender assigns, there are general factors that could impact whether it’s high or low.
Lenders assess both personal and business credit when reviewing loan applications. If you have a newer business that has yet to build up business credit, a lender may heavily weigh your personal credit when making a decision.
A higher credit score generally leads to a lower interest rate. Most lenders require a minimum credit score to qualify for financing. Banks may look for scores of 680 or higher, while alternative lenders may accept scores in the 500s.
Your business’s financial standing indicates your likelihood of repaying a loan, which would impact your interest rate. If a lender perceives you as a high-risk borrower, you would likely receive a higher rate. Be prepared to share information illustrating items like your revenue, cash flow and profitability.
Lenders may have certain revenue requirements, similar to credit scores. You may also be required to explain how you plan to spend loan funds, should you be approved.
Time in business
The amount of time you’ve been in business also indicates how risky you may be as a borrower. Businesses or startups that have been open less than two years are often considered risky because they typically lack capital, collateral or business credit.
Lenders may assign higher rates to these businesses to ensure they get their money back. However, if you don’t meet minimum time in business requirements, you may not be approved at all.
How to get your best business loan rates
The business loan rate you receive is often tied to the type of financing you choose to borrow. But there are a few ways to improve your chances of getting your best business loan rates.
Some types of funding may require collateral, such as equipment financing or invoice factoring. Offering collateral when it’s not required could help you receive more favorable rates. When you provide collateral, you give the lender the ability to seize the assets you offered if you default on the loan. This reduces risk for the lender, and may reduce the amount of interest the lender charges. Loans secured with collateral generally come with lower rates than unsecured business loans.
Boost your personal credit
The higher your credit score, the less risky you may seem to a business lender, which could result in low-interest financing. Depending on your credit score, you may want to improve your credit profile before applying for financing. Some quick ways to build up your credit include:
- Paying down any existing debt, including credit card balances.
- Making on-time or early bill payments.
- Disputing any errors that currently appear on your credit report. You may be able to remove those errors as well.
Boost your business credit
In addition to solid personal credit, it’s important to keep track of your business credit report as well. While personal credit scores have a fairly standardized rating system, business credit scores vary depending on the company calculating the score. For example, Equifax creates three different numbers for small businesses: a business credit risk score, a business failure score and a payment index.
Establish a relationship with a lender
Lenders may give lower rates to borrowers they’ve worked with in the past. Both banks and alternative lenders may be more willing to approve your loan application if you’ve opened a deposit account with the institution. And if you’ve previously borrowed from the lender and made on-time payments, you could have a good shot at getting a second loan. Although circumstances and other factors could prevent you from borrowing and banking in the same place, it would be beneficial to do so, if possible.