Many businesses choose to borrow money to finance expensive purchases, invest in growth, or to improve their cash flow. However, borrowing comes at a cost. You have to pay interest on the money that you borrow, and the higher the rate, the more costly the loan.

Understanding typical business loan interest rates, and how to secure low-interest loans, can help business owners save money and keep their company’s bottom line healthy.

What is a business loan interest rate?

Interest is the cost of borrowing money. Interest is typically expressed as a percentage of the amount you borrowed that is added to your balance each year.

For a simple example, imagine you borrow $10,000 for one year at an interest rate of 10%. With no payments, at the end of the year, you’ll owe $11,000. $10,000 is the amount you borrowed and the additional $1,000 is the interest that accrued.

Usually, you’ll see interest rates on loans quoted as an annual percentage rate (APR). The APR for a loan reflects interest plus any fees or other charges that you might have to pay, such as:

  • Origination fees
  • Processing fees
  • Underwriting fees
  • Application fees

That means that the APR of a loan is usually higher than its interest rate, but that it provides a more complete view of the cost of borrowing. If you know your loan amount, term and interest rate, you can use a calculator to figure out your business loan’s cost.

What is a factor rate?

Factor rates are another way to express the cost of borrowing money. They’re usually expressed as a decimal. To find the total cost of repaying a loan, multiply the principal by the factor rate.

So, if you borrow $10,000 and the factor rate is 1.2, you’ll have to pay back:

$10,000 x 1.2 = $12,000.

Additionally, unlike an APR, loans that use a factor rate aren’t amortized. That means your interest amount is calculated based on the original principal, instead of scaling as you make payments on the loan.

Factor rates are most common with loans where businesses borrow against their accounts receivables, using them as collateral, such as merchant cash advances.

Average business loan interest rates

The cost of a business loan can vary widely based on the type of loan and lender. According to the Federal Reserve Bank of Kansas City, the average rate for all small business term loans in the second quarter of 2022 was 4.76% for fixed-rate loans and 5.35% for variable-rate loans. However, because Fed rate funds have risen since Q2, these averages are likely higher today.

These are some typical starting rates based on loan type and lender. But note that many lenders don’t publicly disclose the upper end of their rate range — so the rate you’re offered may be significantly higher, especially if you have poor credit.

 

Business loan/lender type Interest rate
Traditional banks 6 – 7%+
Online lenders 6% – 30%+
Merchant cash advance (factor rate) 1.09 – 1.5+
SBA loans 6% – 13.5%
Lines of credit 4.4% – 30%+

Factors that can affect interest rate

Many factors influence the interest rates — some that borrowers can influence and others that they can’t.

Business owners can’t control market and economic conditions. The Federal Reserve sets the Federal Funds Rate, a benchmark interest rate, based on the economy. It tends to raise rates when the economy is overheating or inflation is high and drop them when recession looms.

Because the Federal Funds Rate can be a benchmark for other loans, the rates you’ll pay for new business loans can change as the Federal Funds Rate changes. If you choose a variable interest rate, your rate will change with market conditions over your loan’s life; with a fixed rate, it remains the same.

Others you can’t easily change are your business’s age, revenue and industry. Lenders use these factors to predict how risky lending to you might be. They see older businesses as less risky, helping you secure a lower rate. Likewise, the higher your cash flow, the less risky you’ll appear to lenders. Lastly, some types of businesses — such as restaurants — have higher failure rates than others, translating to higher rates.

There are, however, a few ways you can improve the odds of receiving a good rate.

One is improving your credit score. Both your personal and business credit can matter, especially if you’re running a startup or a smaller business. Always pay your bills on time and keep your debts low relative to your income to strengthen your credit.

You can also choose a secured loan over an unsecured loan. A secured loan is backed by collateral — an asset such as inventory or property — that the lender can seize if you default on your loan. The collateral means the lenders is at less risk of losing money, so they may offer you a better rate.

How to get the best business loan interest rate

The number one thing you can do to secure the best loan rates is to make sure your business looks like a low-risk borrower to lenders. That means high revenue, strong cash flow and a good credit history. You may also choose to secure your loan with collateral — though be aware you could lose the asset if you default.

However, that won’t be enough on its own. You’ll need to shop around and compare offers from multiple lenders to find the best deal. Many lenders offer online prequalification tools and other ways to get quotes with just a soft credit pull (which doesn’t impact your credit score).

Once you have several quotes, compare them to find the most favorable rate and terms that work for you. You can try negotiating with each lender to secure an even lower rate, or simply select the one that has the lowest APR.

The bottom line

Business loans are one of the best ways to finance your company’s purchases or to deal with cash flow problems. Landing the lowest rates can help your business save money in the long run.

Before signing up for a loan, consider the best type of business loan for your situation and make sure to shop around to compare offers. That can help you secure the cheapest loan possible.