If you’re looking to get a small business loan to start or expand your company, you may be wondering about the average business loan interest rate.
What is the average business loan interest rate?
The average business loan interest rate for a small business loan in 2021 ranges from as low as 2% or 3% to as high as 100% or more. With so many different types of business loans available for borrowers across a broad credit spectrum, the answer isn’t entirely clear.
Understanding the type of loan you need for your business and your credit situation can give you a better idea of what kind of interest rate to expect.
Average business loan interest rate by loan type
|Loan type||Annual interest rate (AIR)|
|Traditional bank loan||2% to 13%|
|SBA loan||3.75% to 10.25%|
|Online loan||7% to 100%|
|Merchant cash advance||20% to 250%|
|Invoice financing||13% to 60%|
When searching for a business loan, you might come across several types of lenders, including large national banks, small community banks and credit unions, online banks, microlenders and more. Some lenders also make SBA loans, which are partially guaranteed by the U.S. Small Business Administration.
SBA Loan Rates
Rates on loans made by the SBA (such as disaster loans or EIDL) or loans guaranteed by the SBA (such as PPP, 7(a), or 504) are very competitive, but they vary depending on the type of SBA loan. In addition, SBA lenders may negotiate rates within allowable parameters. Learn about SBA loan rates here.
You may also come across different interest rates for different types of loans. Secured loans, for instance, typically charge lower interest rates because the lender has collateral to repossess if small business owners default.
Because some of the interest rate ranges are very broad, it can be hard to know whether an interest rate offer you receive is competitive. As a result, it’s essential that you compare several loan options before applying to ensure you get the best deal.
Where can I find business loan interest rates today?
With so many different commercial lenders out there, there’s no central place where you can view current rates. It’s also important to note that the interest rate you get will be based on your creditworthiness and the strength of your business’ financials and credit history.
With traditional commercial lenders, you might need to apply to get an idea of what rates you qualify for. Some online lenders, however, will let you get prequalified with just a soft credit check to view your rates before you apply.
Are startup business loan rates higher?
In general, the average business loan interest rate for a startup is going to be higher than for an established business. This is because the chances of a startup failing are much higher than for a company that already has a solid track record.
In some cases, it might be difficult even to get approved for a business loan when you’re just starting out. You may need to opt for a microloan, small business credit card, or an alternative form of financing to get the capital you need.
As you build your business credit history and establish a good history of strong revenues and cash flow, however, you’ll have a better chance of getting approved for a business loan with a lower rate.
Fixed vs. variable rates
Some types of business financing carry fixed rates, which mean the rate will remain the same for the life of the loan. Others carry variable rates, which means the rate can change. Loans with variable interest rates may be tied to the prime rate or other rates in the economy. Variable rates are often lower than fixed rates but they may carry more risk for the borrower since both the rate and payment may change. Most small business credit cards and many lines of credit have variable interest rates.
Which banks give the lowest rates for small business loans?
Financial institutions such as banks and credit unions often offer the most competitive rates, but they also often have the most stringent qualifications. They often prefer to make larger loans to well-qualified borrowers.
What does it take to qualify for a low interest rate?
Small business lenders will generally look at the following criteria when evaluating loan applications:
- The personal and/or business credit scores of the owners.
- Time in business
- Business income (usually based on business bank statements)
Other factors such as loan amounts, collateral, and even the industry of the business may have some impact on the rate that will be charged.
It’s not possible to control every factor that goes into your eligibility and your interest rate for a small business loan. But there are some things that you can do to reduce your overall credit risk to lenders.
Improve your personal and business credit
Many business lenders not only look at your business credit history but also at your personal credit score. This is because you might need to provide a personal guarantee in case your business can’t repay the debt.
Start by checking your personal and business credit reports and look for areas where you can improve. Then work to address those issues directly. A few examples include paying down high credit card balances, getting caught up on late payments, and avoiding unnecessary debt.
While fees aren’t included in your interest rate, they are part of the calculation of your annual percentage rate (APR) and can increase the overall cost of the loan. Fees to watch out for include application fees, origination fees, processing fees, service fees, prepayment penalties, and closing fees.
While you can’t necessarily avoid all these fees, compare what different lenders charge to see if you can lower the amount you ultimately have to pay.
Because secured loans typically come with lower interest rates than unsecured loans, it might be worth using assets from your business to secure the loan. This is especially easy to do with equipment financing because you can use the equipment itself as collateral. Just keep in mind that you may lose the asset you put up if you default on the loan.
Don’t just focus on payments
It’s tempting for borrowers to focus on monthly payments and repayment terms without fully understanding the cost of the loan. But some business loans tend to charge higher interest rates, regardless of how solid your credit history and financials are. For example, short-term loans, invoice factoring, and merchant cash advances all tend to charge higher loan rates than traditional term loans.
That doesn’t mean these financing options aren’t a viable option. In some situations, you might need to take advantage of them. But you want to make sure you’re getting the best loan possible based on your qualifications, and you want to be confident that you can repay the financing.
The bottom line
The average business loan interest rate can vary depending on the type of lender you borrow from and the type of business loan products you choose. However, the interest rate you get can end up above or below that average, based on your creditworthiness and how your business is doing.
As you compare business loan products, look at both the interest rate and fees to understand the total cost of credit. Also, look for opportunities to improve your credit so that you pose less of a risk to potential lenders.
While there’s no guarantee you’ll get approved with the lowest rate a lender offers, these actions can help you qualify for more favorable terms.