When it comes to business loans, not all are created equal—especially when it comes to interest rates. Even a small increase in business loans rates could mean you pay significantly more to borrow money over time. It’s worth investing time and energy to find the best rate you qualify for.
What goes into how business loans, rates, and terms are decided? Let’s find out.
Factors Influencing Business Loan Rates
Each lender considers a unique cocktail of criteria when determining rates for business loans. How heavily each of these factors weighs into calculating the final rate will vary from one lender to another.
Credit Score
Both personal and business credit scores affect loan rates. If your company has a business credit or PAYDEX profile, lenders may look at these first. Otherwise, your personal credit will be considered to determine your risk level as a borrower.
Business Financials
Lenders will also consider your business’ revenue, profit, and cash flow to assess how likely you are to repay a loan. If your cash flow is low, you may only qualify for higher-interest loans, since you present more risk to the lender.
Loan Amount and Term
Some lenders offer lower interest rates on loans with longer repayment periods. But keep in mind, even with a lower interest rate, the longer you take to repay the loan, the more you’ll pay in interest overall.
Collateral
Another factor that goes into business loans rates is whether you provide collateral for the loan. A secured loan requires you to provide an asset that, if you can’t pay the loan in full, could be taken and sold to cover the cost of the financing. Because of this, secured loans tend to have lower rates than unsecured loans, which don’t require collateral.
Types of Business Loans and Their Rates
Interest rates will vary depending on your specific situation and qualifications. Here are some 2024 examples of business loans, rates, and terms.
Term Loans
Term loans can be short-, medium-, or long-term, and each comes with its own interest rates.
Long-term business loans are typically repaid over three to 10 years, though some have even longer repayment terms. As of August, 2024, U.S. Bank offers loans with 8.49% interest and repayment terms of 48 to 60 months for qualifying applicants. Other loans have rates up to 13.49%.
Medium-term loans are repaid over two to five years, and interest rates vary from 9% to 30%. Kapitus offers loans up to $5 million with repayment terms of 6 to 24 months, and interest rates starting at 6.2%.
Short-term loans are repaid over 6 to 18 months. Interest rates can range from 8% to 80%.
SBA Loans
There are several different Small Business Administration loans. Here’s a list, with average interest rates in 2024:
- 7(a): up to $5 million
- Repayment: up to 25 years
- Interest rates: 9% to 11.5%
- CDC/504: up to $5 million
- Repayment: 10, 20, or 25 years
- Interest rates: 6.04% to 6.48%
- Express Loans: up to $500,000
- Repayment: up to 10 years
- Interest rates: 12.75% to 14.75%
- Microloans: up to $50,000
- Repayment: up to 6 years
- Interest rates: 8% to 13%
SBG Financing offers SBA 7(a) loans up to $10 million with 2- to 10-year repayment terms, with no fees.
Business Lines of Credit
Lines of credit differ from business loans in that they provide access to funds you can borrow and repay again and again. As of August 2024, American Express offers lines of credit of $2,000 up to $250,000, with various fees:
- 3% to 9% for 6 months
- 6% to 18% for 12 months
- 9% to 27% for 18 months
- 12% to 18% for 24 months
Equipment Financing
If you’re looking to purchase equipment, such as machinery or a company vehicle, equipment financing is an option worth exploring. Because the equipment you’re purchasing acts as collateral, you might qualify for a lower rate compared to an unsecured loan.
Fora Financial offers equipment financing with rates ranging from 2.8% to 10%.
Invoice Financing
If you invoice clients, you can use them as collateral to get financing. You can borrow a percentage of the value of the outstanding invoice, and once the invoice is paid, you repay the loan plus a fee.
SBG Funding offers invoice financing, with rates starting at 0.25% per week.
How to Qualify for the Best Rates
Qualifying for business loans is one thing. Being eligible for the best business loans rates is another. You can put yourself in a better position to qualify for lower interest rates and more favorable repayment terms.
Work on Your Credit Score
If your business has an established credit profile (because you’ve taken out financing or a business credit card in the past), lenders may look at this information to determine your eligibility as a borrower. If not, they’ll look at your personal credit, so make sure it’s in order.
You’re entitled to a free credit report from the three credit bureaus each week (TransUnion, Experian, and Equifax). Review yours to make sure there are no accounts that should be closed or discrepancies that could negatively affect your credit score. If you find any errors, dispute them while you’re viewing your credit report online. The only site authorized by federal law to provide your free credit reports is AnnualCreditReport.com.
Speaking of credit scores, check yours. You might be able to access a free credit score through your bank or credit card issuer. Otherwise, search for one online. Also, find out the score lenders are looking for. SBA loans may require a credit score of 640 or higher, but other lenders may accept a lower score.
Get Your Documents in Order
Once you know which financial or legal documents a given lender requires, make sure you’ve got them at the ready for your application. If you aren’t in the habit of regularly updating your accounting software, take time to review your transactions to make sure the expenses in your profit and loss statement are categorized appropriately.
Fees and Additional Costs
In addition to the business loan interest rate you’ll pay, there may be other fees to borrow money.
Origination Fees
This is a one-time fee lenders charge for making the loan. An origination fee could range from 1% to 6%. Usually this fee is deducted from the loan proceeds.
Prepayment Penalties
While it may seem strange to have to pay a fee if you pay off your loan early, some lenders charge a prepayment penalty. For example, on SBA 7(a) loans, you might be subject to a prepayment penalty if you prepay at least 25% of your loan balance within the first three years after you get the loan.
The fees are as follows:
- First year after disbursement: 5% of the prepaid amount
- Second year after disbursement: 3% of the prepaid amount
- Third year after disbursement: 1% of the prepaid amount
These fees only apply to loans with a repayment period of 15 years or longer.
Other Fees
Lenders may charge other fees, including application, processing, appraisal, guarantee, and late payment fees.
What you’re sure to find out when you start researching business loan rates is that you’ve got a variety of options to choose from. If you don’t like the options available to you, you can take specific steps to improve your chances of getting financing on terms that satisfy you.
What’s next?
- Evaluate your current financial situation, including your credit standing and business performance.
- Spell out your specific financing needs and explore loan types that match your requirements.
- Be prepared. Gather all necessary documents before you apply.
- Compare offers. It might get you on a few marketing lists but it’s worth it if shopping around saves you money in the long run.
- If you don't qualify for the best business loan rates now, work on strengthening your position so you have a better chance of approval in the future.
