Business loan interest rates are one of the most important considerations when looking for the most affordable lender. It is hard to understand what a favorable rate is if you don’t have other references for comparison.
The average interest rate for business loans is not what it used to be ten years ago when banks were less stringent and approved most applications. Traditional lenders now have tighter requirements, making businesses seek out funding from other sources.
It is key to learn what interest rates to expect when applying for a business loan
Here we will provide you with the average rates for small business loans, organized by loan and lender. At Camino Financial, our goal is to help make an informed decision by understanding what business loan interest rates are available for your financing needs.
Business Loan Interest Rates by Type of Loan
The first way to break down business loan interest rates is by organizing them by type of loan.
Here are the APRs (Annual Percentage Rates) for the different types of business funding available:
- Traditional Bank Loans: 4% to 13% APR
- SBA Loans: 7.5% to 10%
- Medium-Term Loans: 7% to 30% APR
- Equipment Financing: 8% to 30% APR
- Lines of Credit: 7% to 36% APR
- Invoice Financing: 13% to 60% APR
- Short-Term Loans: 8.5% to 80% APR
- Merchant Cash Advances: 40% to 150% APR
You might be wondering… why is there such a difference in the range of interest rates?
Lenders with the lowest rates often require a very strong credit score, collateral, and several years in business. While SBA loans have the most favorable interest rates, they are also the most difficult to qualify for. The application process can take several weeks and the applicants are required to submit plenty of documentation to prove they are creditworthy.
Bank loans are similar in nature to the rigorous qualification process of SBA loans. In return, the offer longer funding times when compared with a business line of credit, online loan, or cash advances.
The higher range of interest rates offer some benefits such as faster funding time and card access, which are normally not available in traditional lending options. Also, the loan requirements for short-term and medium-term loans are less strict: even businesses with fair or poor credit can qualify for funding.
Business Loan Interest Rates by Type of Lender
Business loan interest rates also vary by type of lender. Here we’ve compiled the average interest rates for different types of banks and alternative lenders:
- Large National Banks: 2.55%-10.00%
- Small National and Regional Banks: 2.48%-13.00%
- Online and Alternative Lenders: 13.00%-71.00%
When you compare the rates for large banks to that of online lenders, you’ll notice a big difference. Higher interest rates are associated with a shorter underwriting period. Also, online business loans are much easier to qualify for in terms of time in business, annual revenue, and credit score requirements.
To sum up, before making a final decision, you must understand the interest rates associated with each lender and type of loan, and then evaluate if the interest rate you are offered is fair. You can determine if the interest rate is fair by looking at whether you can generate a positive return on the investment you are paying for the rate.
What affects your business loan interest rates?
The interest rates we’ve provided above are for illustrative purposes only, since your final rate will be determined by your lender, who will consider a number of factors. Your credit score is not the only factor for consideration as many lenders look at your full business profile.
Here are the factors that lenders consider when underwriting a business loan:
- Your personal credit score. Learn here how credit score and interest rate are related. And if you need to boost your personal credit score quickly, find here ways to achieve it.
- Your business credit score. Learn here how to build business credit quickly.
- The value of any collateral you’re be bringing to the table
- The amount outstanding on your existing loans, or any debts you are currently paying. Here you have some strategies that can help you pay off your debt quickly.
- The loan amount that you have requested
- The purpose you have for the loan
- Your financial statements
- The length of the loan
- The cash flows of your business
As you can see, lenders examine a variety of conditions when determining your interest rate. You can access a full list of business loan requirements here.
Having in mind all the factors that come into play, it could happen that, for example, you have a strong credit score and still you don’t qualify for a traditional loan because you’ve been less than 2 years in business. This is where online and alternative loans can be a viable option for new businesses.
And always remember: if you are not happy with the interest rate you’re offered, there are ways to reduce it.
High interest rates on your business loan? Here’s how to lower them.
Use this tool to calculate your payments
Interest rates can be scary. But when you shop for a business loan, interest rates are just one part of the big picture. You also need to consider the amount you are borrowing, how long you’ll need to pay it back, and any other fees including origination, processing, prepayment, or packaging.
By combining all this information you will come up with a monthly payment. That’s the key figure to decide on whether your potential loan will be affordable. But how can you calculate your monthly payment? Simply use this small business loan calculator.
Once you arrive at your potential monthly payment, must make sure this number doesn’t exceed the 80% of your net income. It is always ideal to leave room for unexpected expenses or changes in income when factoring in your budget.
It is also critical that the return you expect to get from your investment will exceed the total cost of your loan, including the interest rate and fees. In other words, before making a final decision, you should project the total profits you will get from your investment and compare that figure with the loan cost.
If the numbers make sense to you, all you have to do then is applying for a business loan. Consider Camino Financial as your best option: we offer business loans of up to $400,000 to help your business grow, with interest rates than range from 1% to 2.5% per month and term options from 24 to 60 months. To calculate our interest rates, we mainly take into consideration your personal credit and global cash flows of your business.
We offer more flexibility than traditional bank lenders since no collateral is required. Bad credit is acceptable, and we also offer funding options for ITIN holders.
All you have to do to take the first step is submitting your application online. You will know immediately if you have been prequalified for financing. In less than 24 hrs one of our loan specialists will get in touch with you and guide you through the borrowing process.