The Average  Interest Rate on a Business Loan
Small business loan interest rates vary widely between lenders and depend on a number of factors. To find and qualify for the cheapest loans, you need to not only compare options but also consider the qualification requirements of each lender. Stricter requirements often mean you have to go through a more complicated application process to determine if you’re eligible for the lowest rates.
Average Small Business Loan Rates by Lender and Type
According to ValuePenguin, these are the current small business loan rates for 2019:
- 2.55 to 5.14 percent from large national bank chains
- 2.48 to 5.4 percent from small or regional lenders
- 13 to 71 percent from online alternative lenders
The above rates are calculated as average annual interest rates (AIR) instead of the more familiar annual percentage rate (APR). The AIR represents only the cost incurred when borrowing money, whereas APR includes other expenses, such as origination, closing or document processing fees, which differ by lender.
Comparing loan types provides a more detailed look at what you can expect to pay and is helpful if you already know what kind of loan you need or are trying to decide between two options. Here are the current average APRs for common business funding options:
- Bank loans: 4 to 12 percent
- SBA 7(a) loans: 7.75 to 10.25 percent
- Lines of credit: 7 to 80 percent
- Short-term loans: 8.5 to 80 percent
- Medium-term loans: 7 to 30 percent
- Online term loans: 7 to 99.7 percent
- Merchant cash advances: 20 to 250 percent
- Invoice factoring: 13 to 60 percent
Note that interest rates fluctuate frequently, so a lender may quote you more or less than is shown here. Some sources suggest bank loan rates may go as low as 2 or 3 percent for qualifying businesses.
What Factors Affect Rates from Small Business Lenders?
A lot goes into how lenders price their loans, and not all qualifying merchants are able to get rock-bottom rates. Traditional lenders like banks look at both personal and business credit, and many require a FICO score of at least 600. However, to get low rates on small business loans, your score generally needs to be in the “good” or “excellent” range, which starts at a score of 690.
Along with your credit score, lenders consider:
- How long you’ve been in business
- Your annual revenue
- Your company’s financial history and future projections
- How reliable you’ve been when paying off previous debts
- The industry in which you operate
- The loan amount requested
These factors show how likely your business may be to default on a loan, and higher risk means higher rates. Term length also affects how much you pay, but sometimes a low rate spread out over a longer period of time costs more than a short-term loan with higher rates because you wind up paying more in interest overall.
Several economic factors also influence business loan rates. The market prime rate, which is the rate lenders give their most creditworthy applicants, is used as a baseline for loan costs. It currently stands at 5.5 percent but is subject to change about every six weeks. When the economy is good and businesses are taking out more loans, rates usually go up. Banks lower the rates again in slow times to encourage borrowing, and competition between lenders can play into just how much rates are dropped.
How to Qualify for Lower Small Business Loan Rates
Taking these factors into account, here are a few things you can do to get lower rates on business loans:
- Work on establishing and building your business
- Write up a solid business plan, or update your current plan to reflect growth
- Present clear and realistic financial projections
- Improve business cash flow through strategic marketing and sales tactics
- Make on-time payments to reduce existing debt
- Develop a good relationship with the bank through which you have your business checking account
Most of all, don’t be afraid to shop around! Look for lenders without prepayment penalties so that you can save even more on interest by paying your loan off early. Being diligent with loan payments may make it possible to qualify for even lower rates in the future.
Find Easy Small Business Loan Options Today
National Business Capital and Services offers a number of financial products for small business owners who either don’t meet the qualifications for bank loans or need a faster source of funding. Many of the loans from National require no minimum credit score and only a short amount of time in business, and funding may be available in as little as one business day.
To see if you qualify for a low-interest small business loan, get in touch with an advisor from National and discuss your funding needs. Our marketplace with over 75 lenders makes it possible to find the best rates and terms for your business, giving you the financing you need without a long wait or the burden of excessive paperwork.