Interest rates are a huge factor for those looking into procuring a business loan. And while rates do fluctuate depending on the economic climate, there are certain interest rates associated with various loan types that you can use as a guide to better understand what type of position you'd be in when getting a loan. In 2020, again depending on what the economy happened to be doing and what type of loan product a business owner was looking to get, rates ranged from 2% to 100%. In this article, we take a look at some of the factors that affect the type of interest rate you might be looking at.
Average business loan rates
Is there one average rate per se…not necessarily. And that is because there is a wide array of loan products out there, each coming with their rate as influenced by the borrower's credentials as well. The key is to go into the loan application process knowing what type of loan might best suit your needs and therefore have a better handle on where that interest rate might fall when all is said and done. As a matter of reference, in 2020 some of the average rates according to loan type were as follows:
- Traditional bank loan: anywhere from 2 to 13%
- SBA loan: 7.75% to 10.25%
- Online loans: 7% to 100%
- Merchant Cash Advance: 20% +
- Invoice Financing: 15% to 60%
The type of lender you work with will also impact the type of interest rate you get on a business loan. There are many different kinds of lending institutions out there. From more traditional banks to credit unions, to microlenders, to alternative lenders, you want to take the time to do some research and determine which might be the best fit for you and where the more favorable interest rates are as they relate to your ability to qualify for a loan.
Another factor that could influence the interest rate on a business loan is whether or not the loan is secured. If a loan is secured by collateralassets, the rates tend to be lower because if you do default, the lender then has your pledged assets to fall back on.
So yes, interest rates do range rather broadly, that said, this is precisely why you want to take some real-time and compare the various loan options available.
Finding today's interest rates
Keep in mind, there is not one central platform listing out all average rates for all relevant loan products. That is because there are too many elements that go into determining a business loan interest rate--the borrower's creditworthiness being a significant one. Beyond creditworthiness, the lender will also consider the business's profitability, cash flow, and credit history in coming up with the interest rate for that particular loan.
In working with an online lender though, you may be able to try for pre-qualification and therefore get a better idea of what type of interest rate you'd be looking at if you did get approved for business financing.
Rates for startups
One common question that many new business owners have is whether or not their rates will be higher on a business loan because they are a startup company. Unfortunately, the answer here is usually yes. Startups are at greater risk of failure. They lack a track record, and they likely don't have annual revenue established, and so in applying for a loan (if they qualify/) the interest rate is probably going to be rather high.
The major question with startup funding is going to be if you even can get approved for a business loan. Very often a startup application will be rejected which is why many new companies will first try and go for a business credit card. This is easier to qualify for and will also allow the business to start building up their credit history. You want to be sure to make timely payments, so as not to fall behind and therefore throw up red flags to lenders down the road.
While some things are beyond your control, there are steps you can take to try and get the best interest rate possible.
- Work on that credit score. A credit score is a big component of how your rate will be calculated. The better and higher the score (both personal and business/) the lower that rate will be. You want to be sure to check your credit report. Look for any errors and address them immediately. Look for debt that you could pay down or eliminate.
- Be aware of associated fees. Any fees on the loan are part of the APR calculation and can therefore make the loan more costly for you. Such fees might be application fees, service fees, closing costs, and origination fees, among others. You may not be able to avoid fees altogether, but by shopping around you do have the ability to compare lenders in this regard.
- Can you provide collateral? As noted, a secured loan is generally one with lower interest rates attached. If you can bring collateral to the table, this might help reduce your rate. This works quite well with equipment financing, as the equipment being purchased acts as the collateral on the loan and so your interest rate is likely going to be lower. Do remember though, that the assets pledged can be seized if you default on your loan.
All told, the short answer regarding interest rates on business loans is that they vary widely. Given all of the factors taken into consideration—from loan type to lender type, to the borrower's credentials—it is impossible to have a set average rate. Remember when comparing loans to looks at all relevant factors—not just the interest rate. Be sure to know what the fees are to understand the total overall loan cost.