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- The interest rate and loan amount heavily influence loan costs
- Short terms can lower interest, but long terms have manageable payments
- Additional fees can add hundreds to a loan
- Use a calculator to compare loan costs before settling on a loan.
According to the Federal Reserve’s 2023 Report on Employer Firms, 94 percent of businesses surveyed faced a financial challenge in the past 12 months. Business owners had trouble with rising costs, paying daily operating expenses or bridging gaps in cash flow.
To deal with these challenges, 42 percent of those businesses received a business loan or funding needing repayment.
Business loans can step in to help your business for a variety of reasons, including weathering a financial storm or growing and expanding. But business loans do come with costs that you’ll need to keep in mind as you compare different options.
Let’s dive into the different costs that go into a business loan. That way, you understand what you’re paying for upfront and can find the best loan possible.
Common business loan costs
The interest rate is the price you pay to borrow money, usually calculated as a percentage of the amount you are borrowing.
Many people are quoted an annual percentage rate (APR) when applying for a loan. APR factors in other fees that make up your payment. While you may have an interest rate of 5 percent, for example, your total APR could be 5.25 percent. That total means you’re paying an additional quarter percentage point in fees.
Interest rates can vary widely with different kinds of loans or credit levels. Here’s a look at the typical range of interest rates for different loans:
|Type of business loan
|Typical interest rates
|Small business loans
|6% to 75%+
|Unsecured business loans
|7% to 99%
|Business line of credit
|8% to 60%
|Bad credit business loan
|25% to 99%
|6% to 35%
What influences interest rates?
Your exact interest rate depends on many factors, including the type of loan, your collateral and your personal and business credit history. It can also depend on the prime rate, which is an interest rate banks use as a baseline for setting rates for different borrowers.
Lenders offer the lowest interest rates to prime borrowers with the strongest credit and financial picture. Lenders often look for an established business with a minimum personal credit score of 670 or a business checking account with balances that show high and steady income, such as $100,000 to $200,00 in annual revenue.
But subprime borrowers can find business loans, even with fair-to-bad credit scores of less than 670. Yet bad credit borrowers may be offered loans with higher interest rates, such as 25 percent to 99 percent.
SBA loans come with capped interest rates that help make them more affordable than other types of business loans. Banks and credit unions typically offer the following types of SBA loans to business owners with good-to-excellent credit and strong business financials:
But the SBA also has loans that are accessible to business owners with bad credit:
Example of business loan costs
To get an idea of business loan costs, you can use a calculator to see how much you’ll pay in total based on your loan amount and interest rate. Let’s say you borrow $150,000 with strong credit at an 8 percent APR for five years. With these features, your monthly payment would be $3,041.46 with a total interest cost of $32,487.55.
But if you get the same loan with bad credit, you’d be charged higher interest, such as a 25 percent APR. At this interest rate, you would pay $4,402.70 each month with a total interest cost of $114,161.91.
Factor rates vs. interest rates
Some loans might charge interest as a factor rate, which uses a decimal amount multiplied by the entire loan amount. You may see factor rates used for business loans accessible to borrowers with bad credit, such as lines of credit and merchant cash advances.
You typically pay the entire loan amount plus factor rate, whether or not you repay the loan early. Factor rates are known for converting to high interest rates, so compare these loans carefully with other loans to make sure you’re getting the best deal.
The amount you qualify for
How much you borrow affects the total borrowing costs for the loan because the interest rate is calculated on the principal loan amount. The exact amount you qualify for will depend on your business finances, credit history and the type of loan you’re applying for.
Check out the typical minimum and maximum loan amounts you could get with different loans.
|Typical loan amounts
|$5,000 to $5 million
|Business line of credit
|$1,000 to $250,000
|$10,000 to $500,000
|Up to $50,000
|Merchant cash advance
|$1,000 to $2 million
|Up to $5.5 million
The time it takes to repay the loan
The total interest you pay also depends on how long you take to repay the business loan. In the above example of a $150,000 loan and 8 percent APR, you’d pay $32,487.55 in interest if you pay it over five years. But the same loan would cost $12,818.25 in total interest if paid in two years, saving nearly $20,000 in total loan costs.
Short-term vs. long-term loans
To save money, you can either choose a short-term loan or make extra payments on a long-term loan to pay it off early. Be aware that the lender may charge a prepayment penalty when paying off a loan early.
Short-term loans keep you accountable for paying off the loan in a short time, potentially costing you less in interest. But even the best short-term loans typically charge higher interest rates than a longer term loan.
On the other hand, a long-term loan can offer payments that are more manageable for your budget. The downside is that lenders often tighten lending requirements with longer repayment terms, making them inaccessible to some, like startup businesses. They do so because there’s a greater risk that you could default over a longer time period.
Finally, you want to review the other possible loan fees you may be charged when applying for your business loan. Some lenders keep fees minimal, while others charge high fees that add hundreds or even thousands of dollars to your business loan. Common fees you might run across:
- Application fee
- Closing costs
- Origination fees
- Packaging fee
- Prepayment penalty
- SBA guarantee fee
- Late payment fee
- Draw fee for lines of credit
- Nonsufficient funds fee
Some fees and costs may be negotiable. If a fee seems excessive, or if another lender you’ve prequalified with doesn’t charge it, talk to the lender about reducing or eliminating the fee before finalizing your loan agreement.
The bottom line
The cost of a business loan varies widely, depending on the type of loan you take out, your lender, the creditworthiness of your company and the additional fees you may be charged.
When comparing loans, you want to review more than just the interest rate or APR. Read the fine print and have your lender explain each fee associated with your loan so you can evaluate the total business loan cost.
Frequently asked questions
The exact loan amount you can borrow depends on your business’s financial situation, credit history and the amount the lender is willing to offer. On average, business owners can get loan amounts ranging from $150,000 with a small bank to nearly $600,000 with a large bank.
Repayment terms for business loans can range anywhere from six months to 25 years. The longest terms are typically reserved for commercial real estate, while short-term loans typically offer terms of six to 24 months.