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The average interest rate on a business loan can depend on the type of lender and loan. On average, however, installment loans from banks and credit unions have interest rates in the low single digits. Online lenders may offer an easier and faster application and funding process, but also tend to charge higher interest rates. In either case, your business and personal credit can be an important factor.
What Is a Business Loan?
Business loans can take different forms, including installment loans, lines of credit, equipment loans and commercial real estate loans. They can work like personal loans that are used for business expenses such as office leases and employee pay. But there are also types of business loans that work a bit differently, such as accounts receivable financing, which is when a business uses the money it's owed as collateral to get a loan.
Since business loans are borrowed by businesses and not people, the business's finances and credit are what's scrutinized by a lender. These factors help determine if the business qualifies for a loan, how much it can borrow and the rates and terms it's offered.
A business loan's interest rate can be impacted by:
- The type of financing: Different types of loans may offer different interest rates. For example, long-term installment loans tend to have lower rates than business credit cards.
- The type of business: Some businesses are riskier than others, and lenders may take this into account when setting interest rates.
- Time in business: Lenders may also consider how long the business has been around. Some lenders won't offer financing to new businesses at all, and others may charge new businesses a higher interest rate.
- The business's finances: You may need to share copies of your business's financial statements—the balance sheet, cash flow statement, and income statement—as part of the application process. A strong financial position could help you qualify for lower interest rates.
- Market interest rates: Lenders may base their loans' rates, in part, on a benchmark interest rate. As general interest rates rise or fall, new borrowers may receive higher or lower rates on their loans.
- The business's credit: Businesses can establish and build credit that's separate from the business owner's personal credit. Credit history and scores can impact the ability to get a loan and the rates the business receives.
- The owner's finances and credit: For many small and new businesses, the owner's personal finances and credit will be a factor when getting a loan. The owner may also need to personally guarantee that the loan will be repaid if the business isn't able to fulfill its obligation.
Average Interest Rates by Business Loan Type
Knowing the average interest rates on different types of business loans can help you determine if you're getting a good deal.
Here are several average interest rate ranges for popular types of business financing, and the potential rate range for the Small Business Loan (SBA) 7(a) loan program. The ranges come from Nav's research:
- Traditional bank loans: 2% to 13%
- Online business loans and financing: 7% to 100%
- SBA 7(a) loans: 5.5% to 11.25%
- Invoice financing: 13% to 60%
The interest rates don't include fees that creditors may charge, such as an origination fee on the amount you borrow or an annual fee on a business credit card.
How to Check Your Business Credit
For an established business, the business's credit history and credit scores may be a factor in its ability to qualify for financing and the rates and terms it receives. However, as with your personal credit, there are several business credit bureaus and different business credit scores.
The main three business credit bureaus are:
Each bureau can provide a copy of your business credit report, which may also come with one (or several) business credit scores. You can also find your business credit reports and scores from third-party sources, such as Nav.com. However, unlike with personal credit, there's no law granting businesses the right to check their credit for free.
Different companies also create business credit scores based on these reports, and some scores also consider the business owner's personal credit. A few commonly used business credit scores are:
- The D&B Paydex Score, which ranges from 1 to 100 and may help companies set the terms of a loan or credit line, business insurance rates or even whether they want to work with you as a vendor.
- The Experian Intelliscore Plus business credit score, which ranges from 1 to 100 and can incorporate business owner's information. The score tries to predict the likelihood that a business will be seriously delinquent on a debt within the next 12 months.
- The FICO® Small Business Scoring Service℠ (SBSS), which can incorporate data from both the business and consumer credit bureaus and has a score range of 0 to 300. Your business may need an SBSS score of at least 140 to qualify for an SBA loan.
How Small Business Loan Approval Rates Are Trending
The ongoing pandemic has had a profound impact on small businesses and small business lending. Approval rates have slowly since lows in April, but may be leveling off according to the Biz2Credit Small Business Lending IndexSM, which is based on a monthly survey of 1,000 loan applicants.
|Small Business Loan Approval Rates for 2020|
|Big Banks||Small Banks||Alternative Lenders|
Many business owners may be looking for a loan to help them stay afloat or pay for changes that allow them to safely service customers. Or, some may be experiencing rapid growth and need the money to keep up with demand. While approval rates may continue to increase in the coming months, the relatively low rates compared with the beginning of the year show that small business owners may still have trouble qualifying for financing.
How to Lower Your Business Loan Interest Rate
If you're looking for a business loan, there are a few steps you can take to help you find or qualify for a lower rate.
- Improve your personal credit. Particularly for new and small businesses, your personal credit can play an important role in the rate you receive. Improving your personal credit before applying may help you get more favorable terms.
- Compare lenders. Lenders may offer you different types of financing, and each lender may have its own method for analyzing your application and determining your loan's interest rate. Applying with several lenders can help you find the loan with the best rate.
- Prioritize loans from banks and the SBA. If you start early and can qualify, traditional bank loans and SBA loans may have the lowest interest rate. However, the application and funding process can take weeks or months.
- Look for secured loans. If you can offer business assets as collateral for your loan, you may find it's easier to get a secured loan with a low rate than an unsecured loan.
- Choose a shorter term. Generally, the less time you take to repay a loan, the lower your interest rate will be. However, your payments will also be higher, which could negatively impact your cash flow.
- Opt for a variable-rate loan. If your loan has a variable interest rate, the rate may start lower than a similar loan with a fixed rate. It's a risky option, though, as the interest rate and your payment amount may rise in the future.
- Compare fees. Your loan's interest rate might not be the only cost. Also, review the lenders' fees to determine which loan will cost the least overall.
Check and Monitor Your Personal and Business Credit
As both your personal and business credit could be a factor in your ability to qualify for a business loan, and the interest rate you'll receive on that loan, you may want to make a habit of checking and monitoring your credit. You can get your free Experian credit report online, which includes free credit monitoring. There's also the Business Credit AdvantageSM service, a paid service that includes daily monitoring and alerts for your Experian business credit report and score.