Understanding Business Loan Interest Rates: A Guide for Small Businesses
As a small business owner, you know how crucial it is to have access to financing to grow and succeed. Whether you're looking to upgrade equipment, expand your operations, or simply cover daily expenses, understanding business loan interest rates is essential to making informed decisions about your financing options.
How Interest Rates Work
Think of an interest rate as the cost of borrowing money from a lender. The interest rate, loan term, and loan type all impact the total cost of the loan. To calculate the total interest paid on a loan, you can use the following equation:
Principal of the loan X interest rate X years of term = total interest paid
However, this is just the tip of the iceberg. Other factors, such as loan term and amortization schedule, also play a significant role in determining the total cost of the loan.
Factor Rates and Factoring Fees
Some forms of business financing, like cash advances, use factor rates instead of interest rates. A factor rate is a decimal figure that applies to the original funding amount, rather than the remaining balance. For example, if you receive a cash advance of $20,000 at a factor rate of 1.5, the total payback amount would be $30,000.
Factoring fees, on the other hand, are one-time payments calculated as a percentage of the total value of accounts receivable being factored.
Types of Business Loans
There are various types of business loans available, each with its own set of requirements and interest rates. These include:
- General term loans: These often come with stricter approval requirements and are offered only to businesses that have been in operation for at least six months.
- SBA loans: Designed for more established companies, SBA loans offer funding for various projects and are backed by the Small Business Administration.
- Business cash advance: A business cash advance provides fast access to capital, but at a higher price tag.
- Business line of credit: This gives business owners flexibility in how they use the funds.
- Account receivable financing: This option provides business financing using your business's unpaid invoices as collateral.
Current Average Business Loan Rates
Average business loan interest rates vary based on the type of loan, creditworthiness of the business, loan term length, and economic factors. Here are the current average business loan rates:Loan/Financing TypeAverage Interest RatesBusiness Line of Credit 8% - 60% Business Term Loan 8.49% - 36% Accounts Receivable Factoring 3%+ (factoring fee)Business Cash Advance 1.08+ (factor rate) Equipment Financing 7.5% - 24% SBA Loan Type Interest Rate SBA 7(a)Maximum rates depend on the loan amount. 11.5% - 15% for variable-rate loans, 13.5% - 16.5% for fixed-rate.SBA CAPLinesMaximum rates depend on the loan amount. 11.5% - 15% for variable-rate loans, 13.5% - 16.5% for fixed-rate.SBA CDC/504Tied to 10-year U.S. Treasury rates SBA Disaster Loans Maximum rate 4% with no credit available elsewhere, maximum rate 8% with credit available elsewhere SBA Export Working Capital ProgramNo maximum limit set SBA Microloans8% - 13%
Understanding the True Cost of a Business Loan
Your interest rate is only one portion of the cost of a loan for your business. Depending on the type of loan and the lender, there may be additional fees that you're responsible for paying. These fees may include:
- Origination fee to process your loan application
- Underwriting fee
- Closing costs
- Early payoff fee or a charge to refinance the loan later
To understand the total cost of the loan, you'll want to look at the annual percentage rate (APR), which includes the interest rate, as well as other loan fees like origination, underwriting, and closing costs.
Fixed vs. Variable Interest Rates
Another factor that plays a role in a business loan's overall cost is whether it has a variable or fixed interest rate. A fixed-rate loan will have a consistent interest rate and monthly payment, while a variable rate loan may have a lower interest rate initially, but the rate will change based on the index that fluctuates with the market.
Getting the Best Loan Rate for Your Business
When looking for the best loan rate, you should look at the average APR of different loan types to decide which loan may be best for you. Depending on the type of loan you think would be best, you'll want