Average Business Loan Rates
Updated March 22, 2024 at 10:31 am
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Many small business owners need to borrow money to get their businesses off the ground or expand. Small business loans are one of the most popular ways for entrepreneurs to finance their businesses, but borrowing money isn’t free. You’ll have to pay interest based on the loan’s interest rate and the amount you borrow.
According to data from the Federal Reserve Bank of Kansas City’s Small Business Lending Survey, the average interest rate was 5.89% for fixed-rate small business loans and 12.23% for variable-rate small business loans in the third quarter of 2023. But that’s just an average, and the rate you’re likely to receive can vary based on factors like the type of loan you use, the profitability of your business, and your credit score.
While well-qualified small business owners can borrow money at rates as low as 6%, some business owners could see rates as high as 99% or higher.
Vault’s Viewpoint On Average Business Loan Rates
- Average business loan rates for the third quarter of 2023 ranged from 5.89% to 12.23%.
- If you have bad credit or are starting a new business, interest rates for small business loans can range from 33% to 99% or higher.
- Before agreeing to any loan, review the terms and interest rates to ensure you understand how much you’ll pay.
Current Business Loan Interest Rates
According to data from the Kansas City Federal Reserve, as of Q3 2023, here’s average loan and line of credit rates for companies with good credit:
| Loan Type | Average Rate |
|---|---|
| Urban variable-rate term loans | 8.98% |
| Rural variable-rate term loans | 8.01% |
| Rural fixed-rate term loans | 8.01% |
| Urban fixed-rate term loans | 7.71% |
| Rural variable-rate line of credit | 9.18% |
| Urban variable-rate line of credit | 9.06% |
| Rural fixed-rate line of credit | 8.84% |
| Urban fixed-rate line of credit | 7.43% |
Average Rates by Loan Type or Lender
The Kansas City Federal Reserve’s average rates above are fairly low rates. But they don’t accurately reflect the rates many small business owners may see. Here’s a look at the average business loan rates based on factors such as the type of loan, your credit score or where you apply.
| Loan Type/Lender | Average Rate |
|---|---|
| Traditional banks and credit unions | 7% to 13.25% |
| Online lenders | 8% to 99%+ |
| Variable-rate SBA loan | 10.75% to 13.25% |
| Fixed-rate SBA loan | 13.5% to 16.5% |
| Merchant cash advance | 1.1 to 1.5 factor rate |
How Does Interest Work for Business Loans?
For the most part, interest on business loans works like it does for any other loan. The interest rate on a loan is a percentage of the amount you borrowed that is added to your loan balance each year. For example, if you borrowed $100 at 5% interest and made no payments, at the end of the year you’d owe $105. The higher the interest rate, the more expensive the loan is.
Usually, lenders express the interest rate of a loan as an Annual Percentage Rate (APR). The APR for a loan accounts for the interest rate, how often interest compounds, and any fees you might pay, such as a loan origination fee. That means APR is typically higher than the basic interest rate of a loan, but it also serves as a more true indicator of the cost of the loan.
Factor rates
Some business loans, particularly short-term business loans used to cover cash flow issues, use factor rates instead of interest rates. Instead of being expressed as a percentage, factor rates are a number, such as 1.25. To find out how much it will cost to repay a loan using a factor rate, multiply the amount borrowed by the factor rate.
For example, if you borrow $10,000 at a factor rate of 1.25, you need to pay back $12,500 to repay the loan.
What Affects Interest Rates?
The interest rate for a business loan will depend on a number of factors. Some of these are in your control while others are out of your control.
The Type of Loan
What type of loan you’re applying for plays a big role in how much you’ll pay in interest. Typically, secured loans charge lower rates than unsecured loans because the asset you’re providing as collateral reduces the risk the lender faces.
Small Business Administration (SBA) loans can also have lower rates due to the SBA insurance lenders receive.
The Type of Lender
The lender you work with also impacts the interest rates you’re likely to see. Traditional brick-and-mortar banks often offer a number of different business loan types, making them a good place to check. Most traditional lenders offer low interest rates but typically require good-to-excellent credit. Examples of traditional lenders include:
Online business lenders may be able to offer lower rates, especially if they focus on companies with strong credit. Some online lenders use alternative underwriting models and are more accessible to startups or business owners with bad credit. But these loans often have higher rates. Some of the best online business lenders include:
Both physical and online lenders can also be SBA lenders. These loans have reasonable rates but involve a lot of underwriting and paperwork, so approvals aren’t quick.
Your Business
Lenders will want to examine your business and its operations before approving a loan. What they find will help determine the rates they charge.
Generally, lenders want to see a business with a long history of steadily growing revenue and profits and successfully paying its bills.
If your company has been around for a while and is relatively successful, you’ll have a better chance of landing a lower rate. If you’re running a startup or have bad credit, having a good business plan and proof of concept could help you get approved, but you’ll likely pay more in interest compared to established businesses.
Your Personal Credit Score
Most small business loans look at your personal credit score to help assess your chances of approval and your interest rate. The better your credit, the less you’ll pay.
The lowest possible loan rates are typically reserved for small business owners with excellent credit (a FICO score between 800 to 850). But just having good or great credit (a FICO score between 670 and 799) can also help secure a low interest rate.
But if you have fair or bad credit (FICO score of 669 or lower) and don’t have time to improve your credit before applying, lenders typically charge high interest rates to offset the risk of business loan default. Many small business owners with fair or bad credit could see rates ranging from 32% to 99% or higher.
The Federal Funds Rate
The federal funds rate impacts the interest rates of almost every other loan on the market, including business loans. The Federal Reserve meets regularly and sets this benchmark interest rate based on economic conditions. To fight inflation or cool an overheating economy it can raise the rate. To fight off a recession it can lower the rate.
How to Get the Lowest Business Loan Rates
If you’re looking to borrow money for your business, you’ll want to try to get a loan with the lowest possible interest rate. After all, the lower the interest rate, the less you’ll pay and the more money you can keep invested in growing your business.
Make sure your business looks like a good investment for lenders. Try to cut expenses and boost revenue to show your company has plenty of cash flow to handle a new loan payment. Make sure to build strong credit by paying your bills on time.
Working to improve your personal credit score can also be helpful, especially for smaller companies and startups. Pay down your existing debts and avoid missing or making late payments.
When applying for a loan, make sure you go to the right lender. If the company you use for your business bank accounts also offers loans, that’s a good place to start. Also make sure to apply for the right type of loan. For example, if you’re looking to buy physical assets like equipment, you should apply for a secured loan rather than a merchant cash advance.
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