What Are Business Loan Interest Rates?

We all know that interest rates on business loans can be pretty high, but what exactly are business loan interest rates and how do they work?

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Introduction

When you’re shopping for a business loan, one of the first things you’ll notice is that interest rates can vary widely. They may be expressed as a simple yearly rate (known as the annual percentage rate, or APR), or they may be offered as a low initial rate that later increases (referred to as a teaser rate).

The interest rate is important, but it’s just one factor to consider when comparing loan offers. You also need to look at the fees charged by the lender, as well as the repayment terms. To get the best deal on a business loan, you need to compare all of these factors.

Interest rates on business loans are generally expressed as an annual percentage rate (APR). The APR includes not only the interest expense on the loan, but also any fees charged by the lender. For example, if you are considering a loan with an interest rate of 7% and fees of $2,000, the APR would be 9%.

Loan interest rates can vary greatly from one lender to another, and even from one loan product to another within the same lender. The best way to compare interest rates is to do some research and ask for quotes from several different lenders. Make sure you compare apples to apples, though — that is, make sure you’re looking at loans with similar terms and conditions.

How Interest Rates Are Set

Business loan interest rates are set by a number of factors, including the type and size of the loan, the creditworthiness of the borrower, and the overall interest rate climate.

The prime rate is one of the most important factors that lenders consider when setting business loan interest rates. The prime rate is the interest rate that banks charge their most creditworthy customers. It serves as a benchmark against which other rates are set. When the prime rate goes up, business loan rates usually go up as well.

The federal funds rate is another important factor in setting business loan interest rates. The federal funds rate is the rate at which banks lend money to each other overnight to meet federal regulations. When this rate goes up, it usually means that short-term interest rates will go up as well. This often has an indirect impact on business loan rates, as lenders may raise their rates in response to rising short-term rates.

In general, when interest rates are low, businesses have an easier time accessing loans. Low Interest rates also make it cheaper for businesses to service their debt obligations. Conversely, high interest rates make loans more expensive and can put a strain on businesses with high levels of debt.

The current Interest rate climate is affected by a number of factors, including economic growth, inflation, and monetary policy decisions made by central banks like the Federal Reserve. Central banks use monetary policy to influence interest rates in order to achieve their economic goals. For example, if central bankers believe that the economy is growing too quickly and inflation is a concern, they may raise interest rates in order to slow down economic growth.

In recent years, we have seen historically low Interest Rates due to actions taken by central banks in response to the global financial crisis of 2008. In December 2015, the Federal Reserve raised its target for the federal funds rate for only the second time since 2006. This has been widely interpreted as a sign that the US economy is strong enough to handle higher borrowing costs. As a result of this decision, we can expect to see an gradual increase in business loan Interest Rates over time.

Factors That Affect Interest Rates

Business loan interest rates can vary depending on the type of lender, the size and health of your business, and your creditworthiness. The average interest rate for a small business loan from a bank can range from 3% to 10%, but rates will also vary depending on the length of your loan, the terms you agree to, and whether your loan is secured or unsecured.

There are a number of factors that can affect business loan interest rates, including:
-The type of lender: Banks typically offer lower interest rates than alternative lenders, such as online lenders or merchant cash advance providers.
-The size and health of your business: Lenders will often offer lower interest rates to businesses that are larger and have been in operation for longer periods of time.
-Your creditworthiness: Businesses with strong credit histories will usually be able to qualify for lower interest rates than those with poor credit.

How to Get the Best Interest Rate

The average interest rate for small business loans will vary based on the type of loan product, the lender, and your qualifications as a borrower. However, we’ve compiled some data to get you started on your search for the best small business loan rates.

Type of Loan Average Interest Rate
SBA 7(a) Loan 4.75% – 5.5%
SBA Microloan 6% – 8%
Bank Term Loan 4.5% – 6%
Equipment Financing 4.5% – 10%
Business Line of Credit 7% – 20%
Invoice Financing 0.5% – 5%
Best Interest Rates by Lender
LendingClub 6.95% – 35.89%
OnDeck 9% – 60%

Conclusion

The average interest rate for a small business loan depends upon a number of factors—including the size of the loan, the length of the loan, whether the loan is secured by collateral, and the strength of your business’s financials. But there is some good news: The average interest rate on small business loans has fallen to its lowest level in nearly two years.

According to a recent report from Biz2Credit, the average interest rate on small business loans in September was 9.6%, down from 9.8% in August and 10.2% in September 2016. That’s the lowest level since October 2015, when rates were 9.4%. For comparison, rates were as high as 13% in December 2014 and have been trending downward ever since.

Business loan rates are at historic lows—so if you’re thinking about taking out a loan for your business, now is a great time to do it. Just be sure to shop around and compare offers from multiple lenders before choosing one, and make sure you understand all the terms and conditions of your loan before signing on the dotted line.