Business Loan Rate Options in 2023

Business Loan Rate Options in 2023

Business Loan Rate Options in 2023

If your business needs financing in 2023, you’ll want to pay close attention to the interest rate you can get on your next small business loan. Interest is an additional expense that you have to take into account when figuring out how much you can afford to borrow, and how much your loan will affect your profit margins. 

Here, we’ll dive into average small business loan rates and where to find some of the best small business loan rates to help you understand the true cost of financing this year.

Business Loan Rates in 2023

The prime rate is the rate to which many small business loans (including some SBA loans) are tied. Due to multiple rate increases by the Fed in 2022, and into 2023, which influence the prime rate, it has taken a steady march upward. 

Many small business loans and lines of credit carry variable interest rates. As the prime rate rises, very often the rate business owners will pay goes up as well. And certainly new loans will be impacted by the latest interest rates. 

SBA loans are currently some of the most affordable loan options on the market — but even the popular SBA 7(a) loan may cost up to almost 16% interest at the time of writing.However, there is potential that rates will decrease as early as late 2023 and beyond. Morningstar, for example, predicts that the Federal Reserve will back off of its aggressive rate hikes in the coming years. The investment researcher projects that the prime rate will lower to 1.75% by 2026. Interest rates from banks will likely follow suit, so small business owners may need to just make it through this tough period and wait for financing to become more affordable.

And remember, short-term funding means you’ll pay interest for less time, so even though you might see steep business loan rates, your overall interest owed might be affordable. Borrowing may be worth it when compared with the growth advantages of securing financing. Use Nav’s APR Calculator to figure out the total cost of a small business loan and get a better idea of whether or not it’s worth it in the long run.

Average Business Loan Interest Rate by Loan Type

There is no central source of data that collects and reports the average interest rates that business owners are paying on all types of small business loans and financing. 

Understand, then, that the term “average rate” may sometimes refer to common interest rates being offered by various lenders. There is a tremendous range in the interest rates that may be offered in 2023: anywhere from less than 6% to as high as 100% or more, depending on the type of financing and borrower qualifications.

Average bank small business loan interest rates 2023

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.

Type of loanAverage Rate*
New bank fixed-rate small business term loan6.44%
New bank variable-rate small business term loan7.44%
New bank fixed-rate small business line of credit6.22%
New bank variable-rate small business line of credit8.13%

*Based on Small Business Lending Survey data for the fourth quarter 2022, Federal Reserve Bank of Kansas City. 

SBA small business loan interest rates 2023

The US Small Business Administration makes a limited number of types of business loans (namely Disaster Loans, and Economic Injury Disaster Loans.) Instead it guarantees loans make by participating lenders. 

Here are the maximum rates that may be charged on the most popular SBA loans:

Type of SBA LoanMaximum Interest Rates
SBA 7(a) fixed interest rate loansup to 12.5 to 15.75%
SBA 7(a) variable-rate loansup to 10.5 to 12.5%
SBA Express loansUp to 12.25 to 14.25%
SBA 504 loans6.32 to 6.75%

Interest rates for other types of small business financing 

Here we provide an overview of the rates you may encounter when applying for other types of small business financing. Note that alternative financing options don’t always state an interest rate, and so we have provided a range of equivalent effective rates instead.

Type of FinancingEffective Interest Rate Range
Invoice Factoring25—200% or more
Merchant Cash Advance35—350% or more
Online small business loans15—350% or more

Merchant cash advances (also known as business cash advances), for example, typically state a factor rate, not an interest rate. If you are a business owner expecting to see an interest rate you might not understand how much you are actually paying when the cost is translated to an annual interest rate.

Interest rates for business credit cards

Business credit cards can also be an important source of financing, both for new businesses that may not qualify for loans from traditional lenders, as well as for established businesses looking for short-term financing.

Type of FinancingInterest Rate Range (APR)
Business credit card9.99—34.99%

What Is a Good Interest Rate on a Business Loan?

Often the lower the interest rate you can get, the better, because that usually means you’ll pay less for the loan. But interest rates alone don’t determine what you pay; the length of your loan repayment period also matters. You might secure a lower interest rate with a 10-year loan, but you’ll be paying interest a lot longer than you would with a five-year loan, for example. 

Three other factors you need to consider are:

Fixed-rate loans versus variable-rate loans. As you can see from the average rates listed above, variable-rate loans often have slightly lower rates but they may change if interest rates continue to rise. If you need a short-term loan you may be more comfortable with a variable rate. If you need a long-term loan, you may want to consider a fixed rate for more predictable costs. 

Loan fees. Most small business loans carry fees that add to the cost of borrowing. Fees may include origination fees, underwriting fees, annual fees and more. SBA loans also may include a guarantee fee in addition to other fees. 

Prepayment penalties. If your loan charges a prepayment penalty, or if the cost of financing is charged upfront (as is the case with a cash advance fee), you could end up paying more even if rates go down in the future and you refinance your debt.

Business Loan Rates for Business Lines of Credit

With a business line of credit, there is a wide variation in terms of how much you’ll pay in interest. On the low end, you could pay prime + 2.25%. Or your interest can cost as much as 90% with some lines of credit. The total interest you’ll pay largely depends on the creditworthiness of your business, the type of lender, and other specific factors regarding your business.

Business Line of Credit: Compare the Best Options

It can be daunting to choose between all the different lines of credit available, which is why Nav pulls together your best options and offers you personalized choices based on your business data. Use Nav to see your best options.

Here are some of the options worth considering:

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 all 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.

Where to Compare Business Loan Rates

Comparing rates from different lenders is not the most straightforward process since there’s no central location for the range of rates offered. This is especially difficult because rates can change daily. Also, the rates you can get depend on your business and personal details. 

Nav can help you find financing options based on your qualifications. Don’t let a lack of funding hold you back. Find the best small business loans for your company and take your business to new heights with Nav.

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, as traditional banks often prefer to lend to businesses that have been in business for at least two years. You may need to opt for a microloan, business credit cards, or an alternative form of financing to get the working 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 means 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 business credit cards and many lines of credit have variable interest rates.

Interest Rate vs. APR

You may hear these two terms used with regards to small business loans, and wonder if they can be used interchangeably.

The interest rate is typically used to describe what you pay to borrow money over the course of a year. So if you borrow $10,000 and have 3% interest, you’ll pay $300 per year on the loan. If you take five years to pay it off, you will pay $1,500 in interest over the life of the loan.

APR, or annual percentage rate, also covers the annual cost of a loan, but also includes other fees. APR is usually higher than the interest rate.

What Is the Minimum Interest Rate for a Business Loan?

Again, there’s no single answer to this question. Lenders want to make money, so they will charge some interest for business lines of credit and loans. But it’s often based on current economic conditions. Interest rates have risen steadily over the past year and so have loan rates. 

On the other hand, nonprofit microlender Kiva charges 0% interest and no fees for its crowdfunded small business loans of up to $15,000. Those loans aren’t a good for every business, but the cost is certainly attractive.

How Much Does a Business Loan Cost?

When taking out financing, it’s important to understand the true cost of financing. You can borrow hundreds of thousands of dollars…at a price. The interest you pay, as well as any fees the lender charges, contribute to your cost for financing. And if you miss a payment or are late, more fees can incur.

In the application process, carefully review the loan terms and conditions so you understand how much you will pay for the loan. You may be able to pay off the loan early to save on interest, though make sure you won’t be charged an early repayment penalty fee.

What Other Fees are Associated With a Business Loan?

Interest may not be the only fees you pay for a business loan. Depending on the lender, there may be other fees.

Some charge an origination fee, which is an administrative fee you pay to process your loan application. Some lenders may also charge prepayment penalties if you decide to pay your loan off early. And if you’re interested in refinancing a loan, keep in mind that there may be fees associated with this.

Before signing a loan agreement, read the fine print to see what, if any, fees you will be responsible for.

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. If you don’t have great credit, they may not be an option.

Banks and lenders offering SBA loans also offer competitive rates, and the requirements, while high, may be less difficult to meet than traditional bank loans.

What Factors Affect Business Loan Rates?

Every lender looks at different factors to determine eligibility for term loans, but most, particularly banks and SBA lenders, look first at your creditworthiness. They may look at both personal and business credit scores, and they may have a threshold you have to meet to qualify. The lower your scores, the higher interest rates you may be offered.

Additionally, how long you’ve been in business may determine whether you qualify for financing or not. Startups may have difficulty getting bank loans because they haven’t been in business long enough to prove financial stability.

For some types of loans, like commercial real estate loans, you may also be required to provide collateral to secure financing. 

Other types of loans, such as merchant cash advances, short-term loans, and invoice factoring, may not consider your credit at all, and may instead look at your monthly or annual revenues. You’ll usually need to provide documentation from your merchant account or your business bank account to help qualify. 

What Does It Take to Qualify for a Low Interest Rate?

Small business lenders will generally look at the following eligibility requirements when evaluating loan applications:

  • Owner’s personal credit scores and/or business credit
  • Time in business
  • Annual revenue or average monthly revenue

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. Make sure your business is up to date on business taxes as well. (Tax liens may appear on business credit reports.)

Finding the Loan with the Best Interest Rate

No matter how much capital your business needs or what your credit situation, there are a variety of financing options for you to explore. Just know that the better your credit, the lower interest rates you can find. It’s up to you whether to take out a loan with higher interest or work on improving your credit so you qualify for better rates later.

Understand Fees

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 of money you ultimately have to pay.

Consider Collateral

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 Only 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 more than traditional term loans, at least for well-qualified borrowers.

That doesn’t mean these financing options aren’t viable options. In some situations, you might need 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 interest rate for a business loan can vary depending on the type of lender you borrow from and the type of loan products your business needs. However, the interest rate you get can end up above or below that average, based on your creditworthiness and how well your business is doing financially.

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.

FAQs About Business Loan Rates

This article was originally written on November 5, 2019 and updated on May 1, 2023.

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2 responses to “Business Loan Rate Options in 2023

  1. I am looking to get a small business loan. I tried recently I was unfortunately denied because my credit score was 540. I only have to car loans that are paid on time. I went through a hardship a few years ago. And I am just trying to build my credit again. This is why it’s low.

    I have money to put down. It’s a local turnkey hair salon established 9 years that I’ve worked at for 3 years. I am in the industry for 25 years. Can you help?