Business Loan Interest Rates For 2022: An updated guide
The business loan interest rate should be your primary consideration when choosing a financial institution to get funds for your business.
So, when you’re looking for a small business loan, you should do your best to choose one that offers the lowest rates.
We’ll tell you about the different low-interest small business loan types and the steps you can take to get the most competitive rates.
What Is The Interest Rate On A Business Loan?
The interest rate is the percentage of the loan the financial institution will charge for lending you the amount you requested.
For example, say you take a loan of $10,000 for a year with an interest rate of 10%. You will need to repay a total of $11,000. The $10,000 is the principal, and the $1,000 is the interest (which translates to a 10% interest rate).
#DidYouKnow
High interests can do irreparable harm to your company. They lower your profitability and drain your cash flow.
What Is The Annual Percentage Rate (APR)?
An APR tells you the total cost of the loan.
It includes interest and fees and even other expenses the lender may charge.
So, when comparing rates, it’s better to check APRs instead of just the interest rate. That way, you’ll get a clearer picture of how much you’ll pay.
Types of Interest Rates
There are two main types of interest rates: fixed and variable.
Fixed interest rates stay the same for the entire loan term, while variable rates can change over time. These are typically higher than variable rates when you first take out a loan, but they offer stability and predictability.
Variable interest rates may start lower than fixed rates but can increase or decrease over time.
The best rates on business loans will depend on your personal preferences and financial situation. If you want the stability of a fixed rate, you may have to pay a higher interest rate upfront. If you’re willing to take on the risk of a variable rate, you may be able to get a lower rate initially.
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Average Small Business Loan Interest Rate
The average interest rate for small business loans will vary depending on the type of loan, the lender, the loan size, and the borrower’s creditworthiness.
What are current business loan interest rates?
However, you can find current business loan rates from as little as 3% and as much as 400%.
To help you better understand why there’s such a big gap, we’ve divided current interest rates into 3 different categories:
Rates By Type Of Lender
Here are the average interest rates charged by different types of lending institutions.
| Current business loan rates charged by different lenders | ||
| Type of lender | Loan interest rates | What you should know |
|---|---|---|
| Bank loans | 3% to 13% | It can be challenging to qualify for traditional bank loans. |
| Credit Unions | 8.9% | With relatively low business loan interest rates, borrowers get the advantage of personalized customer service at credit unions. |
| Online lenders | 7% to 100% | You could get reasonable interest rates if you choose one of the best online lenders. |
Rates By Type Of Lending Product
Typical business loan rates can vary wildly between different lending products.
SBA loans are the most economical type of business loan. Although not as low as government loans, term loans have very competitive terms. But certain financial products are unbelievably expensive.
| Current business loan interest rates for different products | ||
| Lending product | Average interest rate | What you should know |
|---|---|---|
| Term loans | 3% – 99% | The rate will mostly depend on your credit score and the type of lender you choose (i.e., bank vs. online lender). |
| SBA loans | 5.5% to 8% | Getting loan approval may be a long process, and it has very stringent requirements. |
| Line of credit | 10% to 99% | Interest rates can be high, but a business owner can access funds as needed. So, you pay interest only when you draw funds. |
| Merchant cash advance | 40% to 400% | MCA’s an expensive source of financing. Use them as a last resort only if you can’t access a lower-cost alternative. |
| Invoice factoring | 10% to 79% | You can use this option only if you have unpaid invoices. |
| Startup loans | 33% to 35% | Camino financial’s Startup loans are an excellent way to fund a new business. |
Rates By The Credit Score Of The Borrower
The business loan interest rates that you’ll pay also depend on your credit score.
High credit scores lead to a reasonable interest rate for business loan applicants.
But if you have a low score, watch out! Small business lenders will typically charge you a higher loan interest rate.
| Credit scores and business loan interest rates | |
| Credit score range | Average interest rate |
|---|---|
| 780-850 | 4.5% |
| 760-779 | 4.7% |
| 700-759 | 4.9% |
| 660-699 | 5.1% |
| 640-659 | 5.5% |
| 620-639 | 6.1% |
Factors That Influence Business Loan Interest Rates
You’ve probably noticed that several factors influence interests. But the type of loan, the lender, and your credit aren’t the only factors affecting these rates.
Let’s get a quick look at all the factors that can affect a loan’s interest rates:
Lender Type
As you may have noticed in the previous section, not all types of lenders charge the same rates. For instance, traditional bank loans work differently from online lenders.
Type Of Loan
Each type of loan charges different interest rates. Why? Because of each loan’s perceived risk.
Personal Credit Score
Most lenders will want to see your personal credit even if you’re raising money for your business. A high score will help you get money quickly and lower interest rates.
Business Credit Score
Your business credit score is also very important. This score ranges from 0 to 100; anything above 76 is a good score.
Does a business loan affect personal credit?
Time In Business
Most lenders will only consider your small business loan application if you meet their minimum “time in business” criteria. This happens because the older your business is, the less risky you seem as a lender.
For example, small business owners can apply for a loan at Camino Financial if they have an active and registered business for at least nine months.
Industry
Your business industry shouldn’t usually influence the business loan interest rates. However, there are specific sectors that many lenders shun.
The gambling industry and speculative house-flipping are some examples.
Make sure to check the restricted industries of your preferred lender.
Repayment Term
If possible, choose a loan with a shorter repayment period. This could lower the interest rate and help you reduce the total interest you pay for the loan.
At Camino Financial, we have repayment terms from 24 to 60 months.
The Financial Position Of Your Business
A business with sound financials will command better business loan interest rates. This can be bad news for new companies.
Fortunately, lenders like Camino Financial help startups too.
Your Relationship With The Lender
This factor is especially relevant to loans from physical lenders. If you have a good relationship, your chances of getting a lower interest rate on your loan are better.
Secured Or Unsecured
As a general rule, secured loans are cheaper. That’s because the lender has the right to seize the collateral if you don’t pay.
At Camino Financial, we offer unsecured loans with competitive rates. That way, you won’t have to put your assets at risk.
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How Interests Can Vary: An Example
Let’s understand how a lender arrives at an interest rate with an example.
Say you’re a business owner who’s looking for equipment financing.
- Your credit score is north of 700.
- You’ve regularly made repayments against the funds you borrowed in the past.
- Plus, your credit utilization on your business credit cards is usually at a level of 30% or less.
If this describes your situation, you can be sure that you will find it easy to raise money at a low-interest rate. You can go to a bank or even the Small Business Administration to get the lowest rates in the market.
But what if you have bad credit?
Will any lender be willing to provide you with a loan?
People with poor credit can raise money. But of course, you might end up paying a higher interest rate.
How do typical business loan interest rates work?
The average business loan rates in the United States are between 4% and 6%. However, this range varies depending on the type of lender, the size and creditworthiness of the borrower, and other factors.
Interest rates on business loans are generally calculated based on the prime rate; the rate banks charge their best customers.
The prime rate is currently around 3%. To calculate the interest rate on a business loan, lenders will add a margin to the prime rate. The size of this margin will vary depending on the lender and the borrower.
Do Small Business Loans Have Fixed Or Variable Interest Rates?
When taking a business loan, you must ask if it carries a fixed or variable interest rate.
Let’s take a moment to understand the difference between the two:
- Fixed interest rate loan: If a loan has fixed rates, the interest rate remains the same during the life of the loan.
- Variable interest rate loan: The interest rate fluctuates based on an underlying benchmark rate. If the benchmark rate rises, your monthly installment goes up. If it falls, it goes down.
The problem with variable interest rate loans is that they are unpredictable. You’re never sure how much you’ll have to pay every month.
At Camino Financial, the term loans we offer carry fixed rates. As a result, you know exactly how much interest you need to pay.
This makes it easier to plan your cash flows. It also protects you from an unpleasant surprise in the form of a higher monthly installment.
If you’re looking for business financing, why don’t you request a quote for a business loan with competitive terms from Camino Financial?
How To Get The Best Rates On A Business Loan
You can do several things to get the lowest interest rates on your loan. Here’s a quick list of things you should know:
- Improve your personal and business credit. Earlier, we told you how a better score could lower interest rates. Although it can take time, it’s definitely worth making an effort to improve your credit.
- Provide collateral. Secured loans usually carry lower interest costs. Providing collateral could save you hundreds or thousands of dollars in interest. These loans can put your assets at risk, though.
- Consider the loan’s actual cost. Some lenders offer low-interest rates but impose additional fees that increase the total cost of the loan. Make sure you ask about hidden fees before you finalize the loan.
- Avoid some types of loans. Stay away from payday loans and merchant cash advances if you can. Because they’re incredibly costly, you should only use them as a last resort.
How To Compare Business Loans Rates
It’s advisable to approach at least three different financial institutions. Then, you should compare their interest costs before selecting a lender.
As we previously mentioned, the best way to find the best loan is not by comparing interest rates but by comparing APRs.
Make sure to research the APRs of the lenders you selected.
If the lenders offer loans with a soft credit check prequalification, apply to know what APR they can offer.
Calculate your business loan interest rate
Another great way to see how much the loans will cost is to use a business loan calculator.
You could use our Business Loan Calculator to find the actual cost of each loan you’re considering.
Key in the loan amount, the period you want to repay, and the monthly interest rate. Click on the “Calculate” button, and the Business Loan Interest Rate Calculator will immediately provide a table with complete details about the proposed loan.
Other Loan Fees To Consider
A business loan can involve one or more of the following fees:
- Origination fees. These are a percentage of the loan amount. The lender charges them for processing your loan.
- Underwriting fees. The lender charges these fees for checking your documents and tax returns.
- Closing costs. This is a term for all the fees you’ll pay for a business loan. Closing costs include origination fees, underwriting fees, and loan processing fees.
- SBA loan guarantee fee. Lenders pay this fee to the government but usually recover it from the borrower. As the name implies, these fees are only applicable on SBA loans.
- Late payment fees. You need to pay these if you delay repayments.
- Prepayment fees. Some lenders charge a fee if you pay your loan early. (Camino Financial doesn’t charge prepayment fees.)
APRs usually consider origination, underwriting, and closing fees too. That’s why they’re a better way to understand how much a loan will cost.
Get A Loan With Friendly Average Interest Rates
Interest rates on small business loans vary widely by lender and loan type.
To complicate matters further, your credit also influences the rate. And you also need to keep a watch on the additional fees that some lenders require you to pay.
In short, it can get pretty complicated to choose a lender.
We invite you to apply for a Camino Financial loan. We have very competitive and friendly rates: from 12% to 55%
With us, you can get from $5,000 to $30.000, and applying won’t affect your credit score. Online business loans allow you to start growing your small business; request a quote today.
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FAQs |
|---|
What is a good interest rate on a business loan?That depends. For most small business borrowers, an annual rate of 10% to 15% is good. But if you have poor credit, expect to pay more. |
Which bank gives the lowest interest rate on business loans?Chase and Wells Fargo offer among the lowest interest rates in the market. |
What is the average percentage rate on a business loan?You should expect a 7% to 53% annual interest rate. |
Are interest rates for startup loans higher?Yes, startup business loan rates are usually higher. But that’s the norm: because your business is new, it’s perceived as riskier. |
What is the average interest rate on a commercial loan?Commercial loan interest rates generally range between 6% and 12%. |
Are small business loans’ interest rates fixed or variable?It depends on the type of small business loan you are talking about. For example, SBA (Small Business Administration) loans typically have fixed interest rates, while some private loans might have variable rates, and online lenders such as Camino Financial business loans have a fixed rate. |
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