There are so many different types of business loans available out there for borrowers across a wide credit spectrum.
The average business loan interest rate for a small business loan in 2020 can range from as low as 2-3% or as high as 100% or more. This makes it quite difficult to give a definitive answer.
However, understanding the type of loan you need for your business and taking into account your credit situation should give you a good idea of what kind of interest rate to expect.
Please see our table below on the average business loan rate by loan type.
Annual interest rate (AIR)
SBA (Small Business Administration) Loan
7.75% to 10.25%
7% to 100%
Traditional Bank Loan
2% to 13%
Merchant cash advance
20% to 250%
13% to 60%
You may encounter several types of lenders when trying to find a business loan. These could be large, national banks or small community banks and credit unions. Or it could be online banks, microlenders, and many more.
As seen above, some lenders also offer access to SBA loans which are in part guaranteed by the U.S. Small Business Administration.
What type of loan you get may also determine what different rates are available for you. For example, secured loans typically charge lower interest rates because the lender has collateral to fall back on if you default.
But because some of the interest rate ranges are so broad, it can be difficult to know whether an interest rate offer you receive is competitive.
This is why it is so important to compare several loan options before applying so you know you’re getting the best deal possible.
The fact that there are so many different commercial lenders out there means there is no central place you can go to view current rates.
Importantly, it also varies by the individual because the interest rate you’ll get offered will be based on the strength of your credit and your business’s financial situation as well as your credit history.
Online lenders will usually let you get prequalified with a quick credit check to view your rates before you can apply.
This can be an advantage over commercial lenders, who may need you to apply to get an idea of what rates you qualify for.
While it’s not possible to control every factor that goes into your business rate, there are some things you can do that will reduce your overall credit risk to lenders, such as improving your personal and business credit.
This is because lenders not only look at your business credit history but your personal credit history too.
This is because you may need to provide a personal guarantee if your business can’t afford to pay the debt. But bad personal credit may also be a sign to lenders that you could mismanage your business credit too.
It’s always a good idea to check out your business and personal credit history, identify any issues and work on them directly.
This could be paying off high credit card debt, catching up with late payments, and just avoiding unnecessary debt.
It is also advisable to watch out for fees that aren’t included in your business rate, such as APR that will increase the overall cost of the loan.
Other fees to watch out for include application fees, origination fees, processing fees, service fees, prepayment penalties, and closing fees.
While it is impossible to avoid all these fees, you can compare what different lenders charge and choose the lender that has the lowest fees.
You can also consider adding collateral. Secured loans usually offer less interest than unsecured loans, so it may be worth using assets from your business to secure the loan.
This may be an option with equipment financing as you can put the equipment up as collateral.
However, you must keep in mind that you could lose the asset if you default on the loan, so never put anything up for collateral that could damage your business.
Also, try to avoid high-interest options. Regardless of your credit history and financials, some business loans like short-term loans, invoice factoring, and merchant cash advances generally have higher interest rates.
However, this is not to say they are not legitimate options. Sometimes you may need to take advantage of them, but if you’re looking for low-interest options it’s best to avoid them.
How much does a business loan cost?
Before you consider applying for a business loan, it is always advisable to do your research and be aware of the costs. This not only puts you in a stronger position to choose the best option but can help you save money as well.
Business loan fees are usually unavoidable, but they can make borrowing more expensive. Small-business lenders can charge from 0% up to 10% of the loan amount in upfront fees.
Of course, this is dependent on factors such as the size of your loan, the type of business loan, the length of the repayment term, and your credit score.
Your lender should always be transparent about what each fee covers and be able to answer any questions you have. Below are some common fees that can be included in a small-business loan.
- Origination fee: This is an upfront fee charged for processing a new loan.
- Underwriting fee: This is collected by underwriters who review and verify the documents you’ve provided, such as personal bank statements, financial statements, credit reports, and tax returns.
- Closing costs: This fee is associated with servicing the loan, and includes things like the loan-packaging fee, business valuation, or commercial real estate appraisal.
- SBA loan guarantee fee: These loans typically have a guarantee fee of 0.25% to 3.75% depending on the size of the loan.
Basically, the interest rate on a business loan is how much a lender charges you for funding.
As we have mentioned, it is important to look around for low-interest business loans, because the following can make a difference to the rates you’re offered:
- The lender: Small-business loans provided by a bank usually have the lowest rates but have specific, tough qualifications. Online lenders tend to have more relaxed requirements but are costly. For example, interest rates on online business loans can range from 9% to 99%.
- Loan type: As we have discussed, lenders offer a wide range of small-business loans and rates vary by product. However, the best deals are often approved by the SBA. Rates for these loans can range from 5.50% to 8%.
- Your financial situation: The lender will look at eligibility criteria such as your time in business, your business income, and your credit score. If you’re a risky borrower, you will most likely be offered a higher rate.
- Your collateral: You may be offered a better rate if you secure your loan with business collateral, like property or inventory. Because the lender can seize these assets if you fail to pay back the loan it reduces the risk to the lender and they can therefore offer you a lower rate.
Other factors can influence rates on business loans such as how much you want to borrow, the length of the repayment period, and the market conditions.
What is the average interest rate on a small business loan?
Small-business loans could have a fixed interest rate or a variable interest rate.
The interest rate and monthly payments for a fixed-rate loan will not change as you pay it off, while a variable-rate loan may have an initial lower rate (usually lower than a fixed-rate loan) but it is subject to change because it is dictated by the underlying index that fluctuates with the market.
Variable interest rates make budgeting tougher as they can be so unpredictable, while it is easier to budget on a fixed-rate loan.
Lump-sum term loans usually have fixed rates and if you are looking for a loan for one-time business purchases or even long-term financing needs (like a major business expansion, buying real estate, or refinancing debt), then this may be the best option.
Meanwhile, a business line of credit may come with a variable interest rate. This almost works like a credit card, allowing you to borrow money and pay it back continuously.
If you don’t need a set amount of money, but easy access to cash for things like short-term working capital or emergency funds then this may be the best option.