What Impacts Business Loan Rates

Last Updated:
August 25, 2022

Impacts Business Loan Rates

A business loan interest rate depends on a variety of factors. Often these factors vary from lender to lender so it is crucial to do your research. Below are the key details that can impact business loan rates.

APR or Annual Percentage Rates

Generally, you expect the APR to vary depending on the lender. Traditional banks tend to have a range between 3-7% whereas online lenders tend to be much higher at 11-44% on average. However, you should be aware that not all business lenders use APR to communicate interest rates. Some may even refer to them as factor rates or annual interest rates.

Rate Types

Business loan interest rates will be either variable or fixed. A variable interest rate can charge throughout the duration of your loan. Usually, the variable rate is determined by market conditions and the prime rate. This causes your payments to change and fluctuate making it difficult to budget repayments. However, a fixed-rate loan is set for the entire duration of your loan. This allows you to easily budget repayments and can decrease stress around the loan.

Business Loan Types

Each type of business loan has a different average interest rate. They also have different requirements that you must meet to get loan approval.

Traditional Bank Loans

Often a business bank loan will have the lowest interest rates among financing options. Usually, these interest rates are between 3% and 7% which is great for businesses. However, banks usually have stricter eligibility requirements. Some of these requirements include annual revenue and business operating time. You may also need collateral to secure the loan

SBA 7(a) loans

This is a specific loan that the U.S. Small Business Administration (SBA) provides through partnerships with financial institutions. Often businesses will have the option of a variable interest rate or fixed interest rate. Variable rates tend to be 7.75% to 10.25% whereas a fixed rate is usually 10.5% to 13.5%. These interest rates are higher than a traditional bank loan as the SBA guarantees the loan. This reduces the risk for lenders while allowing small businesses to obtain the loan easier. The more a business borrows, the smaller the interest rate.

Business Line of Credit

Often a line of credit from your bank will also come with lower interest rates similar to a bank loan. The difference is that a line of credit allows you to make withdrawals as you need from a set amount of funding. Interest will only apply to the amount you use, not the whole credit line. This is also a revolving financing option, as the credit becomes available once you pay it back. Depending on the line of credit amount, you may or may not need collateral.

Online Loans

Getting an online business loan is quite fast and simple. In fact, online lenders are known for lenient eligibility requirements, which is why the interest rates are so high. Often you will pay 11% to 44% for an online loan. The less information the lender needs from you, the higher the interest rate. Be aware of additional fees with online loans as some lenders may charge a monthly fee or a setup fee on top of the interest payments.

Credit Profile

A financial lender will assess both personal and business credit scores while reviewing the loan application. If you do not have a business credit score yet, your personal credit score is crucial. A higher credit score often leads to a lower interest rate as you and your business are a lower risk for the lender.

Business Finances

A crucial detail that lenders look at when approving a loan, is the current success of your business. They may ask to see revenue reports, cash flow reports, and profitability reports. You may also need to show a spending plan to show how the loan will benefit your business.

Time in Business

How long your business has been operating will impact your business loan rates as it indicates how risky you are to the lender. Newer businesses or startups are deemed a higher risk as they often do not have capital or collateral. You may still be able to get a loan, however, interest rates are likely to be higher than for an established business with a proven financial history.

The best way to minimize the impacts on your business loan rates is to build your personal and business credit, offer collateral and establish a relationship with a lender. To establish a relationship with a lender, consider opening a business checking and savings account with the institution to create a financial history with them.

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