If you are looking to get a loan, then you will need to ensure that you get the lowest rate possible while avoiding all hidden fees and charges.
Below, we’ll explore the average interest rate for a small business. Bear in mind that the average interest rate will be a function of the loan amount, repayment term length, business credit rating, and many other variables.
To give you a better idea of the average small business interest rate, we have broken it down into tables by loan type, lender type, and even the specific lender. This will give you a more precise idea about what kind of rate to expect. But before this, we need to take a look at what an interest rate actually is and how it is constructed.
What is an Interest Rate Anyway?
As a current or potential small business owner, you need to break down the interest rate and understand everything about the loan process. This is because interest rates can be misleading and there can be numerous fees and charges that are not openly advertised.
For example, the interest rate is different from the Annual Percentage Rate (‘APR’), and it does not include origination fees or closing charges. Understanding how the interest rate is calculated will help you to figure out if the loan is affordable or not.
Every loan will have a principal figure, along with a rate of interest. The interest rate is expressed as a percentage of the principle. For instance, if you were looking to borrow $500,000 from a bank to get a mortgage, you might get an interest rate of 5%. In total, you would repay $525,000, $500,000 in principle and $25,000 in interest.
However, this is only for a one year term. For a 20 year mortgage, the total amount would be $1,000,000. Some lenders will use a compound interest rate, though this is not typically used for small business loans.
Business loans are frequently calculated using a base/prime rate, along with the spread charged by the lender. This makes up the total interest rate, but there will often be other charges along with this.
Current Average Small Business Loan Interest Rate
It is difficult to determine the exact average small business loan interest rate because averages can be very misleading. The ‘average’ interest rate will vary depending on your loan type, term length, credit score, and many other factors.
As a very general rule of thumb, most businesses can expect to pay between 6% – 10% for an SBA loan and between 8% – 12% for a standard term loan with online lenders. The interest rate for a small business loan is typically in the region of 4% – 6% if the business has an excellent track record with a good credit score and goes to a bank or large financial institution.
For smaller businesses that are looking to alternative lenders, the rate will be more in the region of 8% – 12%. However, it will also depend on the term length of the loan and the loan type on offer. Microloans for underprivileged businesses can go as low as 4%. SBA 504 loans for fixed assets can also go as low as 4%. Disaster relief loans are also similar for a similar figure. But these loans can be hard to qualify for.
The smallest interest rate you will get is the prime interest rate. This has been fixed at 3.25% since 2009. The lender will then add additional interest on top of this. Only top applicants will get anywhere close to the prime interest rates, around 4%.
What Determines an Interest Rate for a Small Business?
There are many determinants when it comes to small business interest rates. The more you can demonstrate that the loan will be repaid, the lower your rate will be. The higher your chances of failing to make the repayment, the higher the interest rate will be. This is natural – the banks and lending marketplaces need to offset the increased risk with a higher interest rate. Three of the main interest rate determinants include:
- Time in Business – A business with a long history is obviously going to be preferred to one that is just starting. In particular, banks and financial institutions look towards established businesses. This is because they will not make any extra money from high-risk startups. They would prefer a low-risk low reward business that is more reliable.
- Credit Rating – Your credit rating is the number one consideration when it comes to determining an interest rate. The credit rating is an amalgamation of a number of key metrics, such as your total debt, loan types, repayment history, etc. The FICO scoring system is among the most common. Aim for a credit score above 600 to get a good interest rate. Ideally, 680 and above should secure you the best rates and the best chance of success.
- Collateral – If you supply collateral, then the risk to the lending institution is greatly minimized. Because if anything goes wrong, they can simply acquire the asset. This is often done in equipment financing, where a loan is taken for the purposes of essential business machinery. The machinery itself is the collateral, which ties up a lot of loose ends. You can also use your home as personal collateral, though this may lead to stress and potential disaster if things go awry.
This is not a definitive list. Your cash reserves, industry, loan type, and term length will also play a role. It is a complex field with many moving parts. There are plenty of tools that you can use to calculate the interest rate on a loan.
You can use an interest rate calculator to figure out what you will be paying back. Business loans will quote the interest rate in terms of the Annual Percentage Rate (‘APR’). The APR takes any additional charges and upfront fees into account, so you know exactly what you are getting into. However, there are still fees and charges that are not factored into the APR, as useful as it may be.
Interest Rates By Loan Type
Average interest rates vary greatly depending on the particular loan you are in the market for. Below is a table mapping the average interest rate per loan. All data is taken from the FDA official figures. However, keep in mind that this interest rate is not an APR, but an Annual Interest Rate (’AIR’). The total amount will be higher when other fees are taken into account. It is also a range, and not an absolute figure. There is much variance with regard to business loan interest rates.
|Loan Type||Average Interest Rate|
|Traditional Bank Loan||2% – 13%|
|SBA Loan||7% – 10%|
|Online Loan||7% – 70%|
|Merchant Cash Advance||20% – 250%|
|Invoice Financing||13% – 60%|
Average Small Business Interest Rates By Lender Type
|Lender Type||Average Interest Rate|
|Large Banks||2.5% – 5.5%|
|Small and Regional Banks||2.4% – 5.4%|
|Foreign Banks||1.5% – 5.6%|
|Online Lenders||13% – 71%|
Average Interest Rate Broken Down by Specific Lender
|Online Lending Institution Name||Average Interest Rate|
|American Express (business loan)||6.98% – 19.97%|
|American Express (merchant financing)||11.50% – 25.90%|
|Balboa Capital||3.00% – 30.00%|
|BlueVine (invoice financing)||15.00% – 68.00%|
|BlueVine (line of credit)||15.00% – 78.00%|
|Credibility Capital||8.00% – 25.00%|
|Credibly||9.99% – 36.00%|
|Currency||8.00% – 36.00%|
|Fundation||7.99% – 29.99%|
|Fundbox (invoice financing)||13.00% – 60.00%|
|Fundbox (line of credit)||15.00% – 59.00%|
|LoanBuilder (by PayPal)||6.49% – 19.31%|
|Guidant Financial (SBA loan)||6.50%|
|Kabbage (line of credit)||20.00% – 80.00%|
|LendingClub||5.99% – 29.99%|
|OnDeck||9.30% – 99.70%|
|PayPal Working Capital||15.00% – 30.00%|
|QuarterSpot||20.00% – 48.00%|
|SmartBiz (SBA loan)||Prime Rate + 1.50% – 2.75%|
|SnapCap||19.99% – 49.99%|
|StreetShares||8.00% – 39.99%|
|Wells Fargo (unsecured business loan)||6.75% – 22.99%|
Loan Fees to Look Out For
The APR is very useful as a tool for comparing the interest rates on loans. However, it does not cover all types of loan fees. Here are four of the most common fees to keep an eye on:
- Application fee – This is non-refundable, and will be the fee for the application. This should not cost too much money.
- Origination fee – This is the cost to process the loan itself. Many lenders can charge high origination fees with lower APR rates, so make sure to check if the loan you are applying for has an origination fee attached.
- Prepayment penalty – Many loans come with prepayment penalties, including the SBA (7)(a) loan. This means you cannot pay the loan off early to reduce the overall interest you would have to pay.
- Late payment fees – All loans will have late payment fees for those who fail to make payments.
While nearly all small business loans charge simple interest, it’s best to double-check. The alternative (known as ‘compound interest’) effectively charges interest on interest and works out much more expensive.
Another hidden ‘cost’ you need to look into includes the reliability of the lenders, especially if it is an online marketplace. Many of the online lenders do not have the best interests of the customer at heart. You might find it difficult to get a straight answer or to contact the customer support team.
Stick to well known online lenders such as Lendio, OnDeck, Lending Club, Fundbox, and PayPal LoanBuilder. You can easily see what you are getting into, how quickly the turn around speeds are, and what the typical interest rate will be.
Other Factors To Consider Aside From Interest Rates
It’s no great secret that the interest rates are lower with banks and large institutions in comparison to online lending marketplaces. But there are some other items you will need to consider.
For one thing, there is great stress associated with a bank loan. Even if the loan offers a lower rate of interest, it can take months to process an application and then have your application turned down. There is also an incredible level of documentation necessary to qualify for the standard SBA (7)(a) loan. Check out our guide if you want to know more about the 18 SBA programs on offer.
With all of these taken into account, it might be easier to secure a loan with a slightly higher APR, but one you know will be delivered. You could have the cash in your account within 48 hours in many instances. You might want to take the hit of a higher interest rate in lieu of a loan that is guaranteed to be approved so you can have the money sooner rather than later.
How Can I Lower My Interest Rate?
There is little you can do to change your industry, and you may also require a particular type of loan. But what you do have a level of power over is your credit rating, which will play a major role in determining your eligibility for a loan and the total rate of interest you will be expected to pay.
The quickest way to lower your interest rate is to raise your credit score. This is beyond the scope of this article, and it takes time to work. The other thing you can do to lower your interest rate is to provide collateral for the loan. This reduces the risk to the lender.
You could also consider using friends and family to provide funding or go down the crowdfunding or venture capital route. Unfortunately, all of these come with a number of drawbacks which make them unlikely candidates except for a few niche small businesses.
The average interest rate for a small business loan varies greatly depending on many factors, including the specifics of the loan you are looking for, your industry, lender, credit history, and much more. At some point, you may need to bite the bullet, make an application, and take the best loan that you can in a reasonable time frame.
At Finimpact, we can save you some time and assist in finding the right loan for your unique business model.