If you’re looking to get small business loans to start or expand your company, you may be wondering about the average business loan interest rate since that will impact what you pay overall to get financing for your business. Prime rates have increased in 2022, which has led to business loan interest rates going up as well. However, there is reason to hope for lower rates in 2023.
In this article, we’ll dive into average business loan rates and when rates may go down to help you understand the true cost of financing going into next year.
Business Loan Rates Going into 2023
The Federal Reserve has increased the prime rate several times this year, leading to some increases in interest rates for products like small business loans. As CNBC pointed out, such high rates could make it much more difficult for small businesses to afford to borrow. Small businesses may struggle to make enough revenue to pay their monthly payments on the funding they’re borrowing. SBA loans are currently some of the most affordable loan options on the market — but even the common SBA 7(a) loan may cost up to 11% interest at the time of writing.
However, there is potential that rates will decrease in 2023 and beyond. Morningstar 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.
Halting business growth because rates are higher may not be the best move for your business since it might not put you in the best position when rates do fall.
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
The average business loan interest rate for a small business loan in 2023 will likely range from as low as 3% or 4% 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 Interest Rates
|Loan type||Annual interest rate (AIR)|
|Traditional bank loan||3% to 13%|
|SBA loan||8.5% to 11%|
|Online loan||11% 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.
What Is a Good Interest Rate on a Business Loan?
Ideally, the lower the interest rate you can get, the better, because it means you’ll pay less for your 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, for example, five-year loan.
SBA Loan Rates
Rates on loans made by the SBA or loans guaranteed by the SBA (such as the SBA 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 loan programs. SBA secured loans, for instance, typically charge some of the lowest 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.
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.
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, as traditional banks and the SBA require you to be in business for at least two years, typically. You may need to opt for a microloan, small business credit card, 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.
Interest rate is 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. Right now, the interest rate is incredibly low, so to compete and get your business, lenders may offer rates as low as 2%. If you get a loan with a fixed rate, you will pay just 2% for the life of the loan. But as economic conditions improve, that rate would rise if you have a variable interest rate.
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.
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, this 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.
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:
- The personal and/or business credit scores of the owners
- Time in business
- Annual revenue (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.
Finding the Loan with the Best Interest
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.
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.
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 higher loan rates than traditional term loans.
That doesn’t mean these financing options aren’t viable options. 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 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 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.