Small business owners have been dealing with a lot of challenges over the past few years, and higher interest rates are one of those challenges. Higher interest payments often mean higher loan payments that can cut into cash flow. Because business loan amounts are usually higher than personal loans, small differences in rates can make a big difference in the total cost of your loan. 

Here’s how to cut business loan rates and minimize costs. 

Understanding Business Loan Rates

When asked about where they chose to apply for a small business loan, a quarter of borrowers who applied at a large bank or small bank cited the interest rate as a factor in their choice. Only 15% of those who applied at an online lender, and 22% of those who applied at a finance company said interest rate was a factor in where they decided to apply, according to the Fed’s Small Business Credit Survey 2022. 

Business loan rates range significantly from lender to lender, the type of financing requested and the repayment term. The lowest rates tend to go to borrowers with excellent qualifications. Even if you don’t qualify for the lowest rate, reducing the rate you’re paying may help you save money and pay off your debt faster. It’s worth investigating.  

Find current average business loan rates here. 

Factors Influencing Business Loan Rates

There are a number of factors that can impact the rate you’re quoted when applying for a small business loan:

1. Borrower eligibility. Business lenders want to take careful risks. If the lender considers the borrower to be low-risk, he or she may qualify for a lower rate. Low credit scores, declining revenues and other qualification factors may make the borrower appear risky. 
2. Prime rate. Many business loans carry variable interest rates tied to the prime rate. When interest rates in the economy change, rates can change. The Federal Reserve has raised interest rates multiple times in 2022 and 2023, and as a result, rates on consumer and business loans have risen as well. 
3. Type of financing. Business loan interest rates vary widely depending on the type of financing and the source. Small business loans from traditional loans like banks or credit unions often carry low rates, while rates at online loans may carry low or high rates, depending on the lender, loan type, and qualifications. 

How to Cut Business Loan Rates

When it comes to interest rates, there are some factors that are more in the borrower’s control than others. You may not be able to control interest rates in the economy, for example, but you may be able to work on establishing business credit to help boost your qualifications. Here are some ways to help cut business loan rates: 

Improve Your Creditworthiness

Most lenders will check the applicant’s personal credit score and some may check business credit scores as well. Higher credit scores can lead to better loan rates. Check your credit history before you apply so you’ll know what lenders will see. 

If your credit isn’t strong you won’t fix it overnight but you can start working on it to help qualify for better terms in the future. In fact, besides increasing revenues, this is one of the best things you can do to help increase your chances of getting approved. 

Strengthen Your Business Financials

Higher business revenues open up more small business loan options. That’s because income and cash flow are one of the top factors lenders consider when evaluating small business loan applications. 

You want to be able to demonstrate strong income whenever possible, and most lenders will require you to provide bank account statements to confirm revenue. Make sure you are using a business checking account to deposit money you bring into your business so you have proof of income.

Some lenders may request business financials. This is especially true for bank loans and SBA guaranteed loans. Make sure you’re up to date on your business accounting so you can provide financial statements if requested by lenders. 

Research and Compare Lenders

There is a wide range of types of business loans. Depending on the lender and product you choose, your cost will vary. Researching offers from different lenders may help you find a better loan at a lower cost. 

Explore Loan Refinancing

Refinancing your loan with another lower cost lender may be a viable strategy for getting a lower interest rate, especially if your qualifications have improved since you obtained your current loan. Even if you can’t refinance all of your debt, you may be able to refinance the most expensive debt.

Read our guide to refinancing and consolidating your small business loan. 

Negotiate with Current Lenders

If you are struggling to make your payments, your lender may be able to offer a hardship plan that allows you to skip some payments or reduce your monthly payments. This can carry consequences for your credit, though, so consider it carefully. 

Consider Alternative Lending Options

You may be able to get a different type of loan that offers better financing terms. You may find some creative ways to reduce your costs. For example, if you have a high-cost short-term loan with daily or weekly payments, perhaps you can refinance it with a 0% APR credit card. 

The major types of small business loans include:

Line of credit. A business line of credit offers short-term business financing. 

Term loan. This type of financing provides a fixed amount of money, usually with a set repayment period ranging from several months to ten years or more. 

Merchant cash advance. Business cash advances can be an expensive type of financing so be careful if your goal is to lower your cost. However, the advantage of this type of financing is that good credit isn’t usually required. 

Business credit cards. While credit card rates generally can be fairly high, they are often cheaper than other types of fast small business financing. And, as mentioned earlier, some credit card issuers offer 0% intro APRs. 

Equipment financing or leasing. If your business uses equipment, you may be able to use equipment financing to free up cash flow you can use to pay your debts more quickly. If your business owns equipment outright, a leaseback arrangement may provide you with cash you can use to pay down other debt. 

SBA loans. There are several types of loans guaranteed by the US Small Business Administration, including both term loans, lines of credit and even real estate loans. They often carry low interest rates but require good credit to qualify. 

Crowdfunding. There are several types of crowdfunding, including rewards crowdfunding and investment crowdfunding. Most types of crowdfunding don’t charge interest though there are other costs associated with this type of funding. 

Microloans. These smaller loans are often made by non-profit lenders, and though loan amounts aren’t usually large, they often carry reasonable rates and repayment terms. 

Vendor terms. Short-term financing from your suppliers may come at a very low cost. In fact, many companies that offer net-30 terms don’t charge interest. While this type of business lending won’t give you cash to refinance other types of debt, this type of financing can help you free up cash flow for other purposes. 

Conclusion

Lower interest rates can help your business improve cash flow, save money on total interest costs and get out of debt faster. If your business is currently struggling with high interest rates, exploring your options may turn up opportunities to save money. 

Nav can help your business find financing options based on your business data and qualifications. Get started now. 

FAQs About Business Loan Rates

Can Refinancing Lead To Higher Costs in the Long Run?

Refinancing a business loan can increase the cost of borrowing over the life of the loan. You may refinance your balance into a longer term and that can result in higher interest over the time it takes you to repay your loan. Or you may refinance at a higher rate. Not all small business loans state costs as an Annual Percentage Rate (APR) or interest rate, which can make it difficult to compare costs. 

Prepayment penalties on your existing loan can also make it more expensive when you try to refinance your loan. 

How Often Should I Review My Loan Terms and Rates?

Review your loan terms and rates at least once a year. If you are trying to get a lower rate, it’s also smart to monitor your personal and business credit, and to keep your bookkeeping up to date so you can provide financial information if required by the lender. 

If you don’t have time to stay on top of all the lending options out there, Nav can help. Connect your data and Nav will show you financing options based on your qualifications. 

How Often Do Business Loan Rates Change? 

If your business loan doesn’t carry a fixed interest rate, it has a variable interest rate and that means it can change in the future. Variable rate loans typically adjust monthly or quarterly, though they can change at other intervals.