Interest rates are one of the most important factors when comparing the cost of business loans. As of April 1st, banks are charging their best credit borrowers an average of 8.50% APR on term loans. But other types of business loans – like short-term working capital loans – can have APRs up to 150% or more. So, it’s hard to know if you’re getting a good rate if you’re not familiar with the different types of loans, what they’re for and what rates to expect.
To help you, we break down the average rates for each type of business loan and explain how you can get the best deal possible.
When it comes to business loan interest rates, there’s no one size fits all. Rates can go from as low as 7.50% APR for a traditional bank term loan from a lender like Bank of America to as high as 150% APR or more for a quick turnaround working capital loan from an online lender.
In fact, the range of rates available for small business loans varies so much that it makes more sense to break down the rates by the type of business loan. Of course, other factors affect your rate, like your credit score, revenue and time in business — and whether you’re providing collateral.
When evaluating different business loans, always compare APRs, not interest rates, to calculate how much your loan will cost. The APR percentage includes both the loan’s interest rate and any applicable fees, so it shows the total cost of borrowing better than just the interest rate.
Since some business loans come with fees rather than interest, let’s take a look at how APRs compare for several loan types:
| Type of loan | Interest rate |
|---|---|
| Bank term loan | 7.71% to 8.98% |
| Online business loan | 9% to 75% |
| Business line of credit | 8% to 60+% |
| SBA loans |
|
| Merchant cash advance | 25% to 250+% |
| Invoice factoring | 13% to 60% |
In general, bank term loans have the most competitive rates, especially for existing customers, while short-term working capital loans from online lenders tend to have the highest rates.
While the Small Business Administration (SBA) establishes the maximum interest rates that lenders can charge for SBA loan programs, these rates are largely based on the Prime Rate or US Treasury security rates and the underwriting guidelines of the lender, and they come with rate limits.
For SBA 7(a) loans:
| Loan amount | Maximum rate |
|---|---|
| $50,000 | Prime rate + 6.5% |
| $50,001 – $250,000 | Prime rate + 6% |
| $250,001 – $350,000 | Prime rate + 4.5% |
| $350,001+ | Prime rate + 3% |
SBA 7(a) loans can have either fixed or variable interest rates.
SBA 504 loans have fixed interest rates that are pegged to yields on 10-year US Treasury securities, plus a margin. Rates for SBA Microloans and Community Advantage loans are also subject to SBA maximums, but vary depending on the lender.
A business loan interest rate is the cost of borrowing, expressed as a percentage of the loan amount that your lender charges regularly. There are two types of interest rates: Fixed or variable. There are also two types of interest calculations: Simple or compound.
Here’s a rundown of the differences, plus an explanation of how a business loan’s interest rate differs from the annual percentage rate (APR).
Fixed interest is an interest rate that stays the same while you pay back your loan. It’s less risky than a variable rate, because it doesn’t fluctuate and makes repayments more predictable. On the other hand, variable rates are subject to change, usually every month or quarter.
Variable rates are made up of two parts: A fixed interest rate called a benchmark rate or index, plus a margin rate, which is based on your creditworthiness and other factors. The LIBOR rate and Wall Street Journal prime rate are two of the most common types of benchmark rates — which represent the lowest interest rates that lenders are charging borrowers.
However, while less common, there are hybrid business loans that offer a mix of fixed and variable rates throughout your loan term.
Simple interest is calculated on your loan’s principal amount only — it doesn’t include compounding interest. You can calculate how much you’d pay on a simple interest loan with this formula:
Principal x interest rate x loan term (in years) = Simple interest
Compound interest takes a little more number crunching to calculate. It’s when lenders charge interest not just on your loan principal but also on any unpaid interest that has accumulated since your last payment. This makes it more expensive than simple interest.
Some lenders compound interest on an annual, monthly, weekly or even daily basis. The more often your loan compounds, the more you’ll end up paying in interest.
Unlike an interest rate, the APR includes both the interest and fees of a given loan, as a percentage, that applies to your loan per year. Lenders often advertise a loan’s APR, instead of its interest rate. That’s because it’s a more accurate picture of how much your loan will cost.
When comparing APRs, make sure you’re also comparing loans with similar terms and amounts. A loan with a 100% APR and six-month term might actually cost less in the long run than a large loan with a 15% interest rate and a five-year term.
Here’s a list of the main factors that affect your business loan interest rate:
Here are 6 tips to follow to get the lowest rate possible on your loan:
While rates are an easy way to compare, they’re not the whole picture. In addition to a loan’s APR, these fees may also apply to certain loans.
| Fee | Typical range | When it applies |
|---|---|---|
| Origination fee | 1% to 10% of the loan amount | Not all lenders charge an origination fee, but if it applies, it will be deducted from your funds before you receive them. |
| Referral fee | Varies | Some business loan connection services charge a referral fee if you get funded by a lender through their service. |
| SBA guarantee fee | 0.25% to 3.75% of the guaranteed portion of the loan | This fee is either added to your SBA loan amount or deducted from your funds before you receive them. Some borrowers may qualify for a waived SBA guarantee fee. |
| Late fee | Either between $10 to $35 or 2% to 5% of your loan amount | A fee charged if you miss a payment. Many lenders have a grace period of around 15 days before the late fee applies. |
| Nonsufficient funds fee | $15 to $35 | A fee charged if your bank account doesn’t have enough funds to cover your loan payment. |
| Withdrawal fee | $1 to $4 per withdrawal | A cost for using your credit or debit card, if your loan is issued using a card — especially if you’re withdrawing from another bank’s ATM. |
| Prepayment penalty | Varies | Some SBA loans and commercial real estate loans have prepayment penalties if you pay the loan off within a certain timeframe. |
| Wire transfer fee | $15 to $35 | Covers the extra cost of sending a payment via wire transfer. |
You may think a low interest rate is the most important feature when comparing business loans. However, according to Finder’s Consumer Confidence Index, most respondents agreed that low fees was the top consideration when shopping for a business loan, at nearly 60%. Runner up for most important feature of a business loan was fast funding speed at nearly 50%, followed by low interest rates at 45%.
*This question was answered by a small sample of self-employed people who’ve taken out or are thinking about taking out a small business loan.
A low interest rate is an important consideration while loan shopping. However, factors like fees should weigh heavy in your consideration since they greatly increase the cost that you’ll pay for the loan overall. As mentioned, the APR includes the loan’s interest rate and applicable fees, which gives you a more clear picture of borrowing costs compared to the interest rate alone.
Because there are so many flavors of business loans, there’s no such thing as an average business interest rate. But knowing the general range of rates you can expect on a specific type of loan or from a specific lender can help you find the best small business loan for your situation.
According to data compiled by Statista, alternative online lenders had the highest business loan approval rates in 2023, which accepted over 28% of applications in the US. Big banks had the lowest approval rates.
The prime rate is based on the federal funds rate, which is the rate banks use to lend to other banks. The better your credit and the more established your business is, the more likely you’ll be offered interest closer to the prime rate.
It depends on the type of loan you’re applying for. Term loans typically range from one to 10 years, while SBA loans come with terms from five to 25 years. And short-term loans can come with terms from three to 24 months.
Commercial loan interest rates vary depending on the loan type and lender. Right now, bank commercial loans typically have rates between 7% and 12%, while commercial real estate loans may have rates between 5.25% and 10%, depending on the collateral.
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