The average business loan rates for 7 types of loans
When personal savings, funds from friends and family, and other sources can’t get founders any further, a business loan offers crucial capital for growing companies. And although the right loan product checks off multiple boxes, it’s particularly important that you secure a favorable business loan rate for your burgeoning business.
Business loan rates range widely depending on the type of loan. Factors like your business history, credit score, and profitability largely determine your specific loan terms.
Generally, you’ll get a lower interest rate with a traditional long-term loan compared with options like cash advances and invoice factoring. Small business lenders consider the big picture, too. Business loan rates fluctuate daily based on the ebb and flow of the national economy.
With all these factors in play, it’s best to be familiar with all your business financing options and know how to recognize a competitive interest rate. Learn what kind of rates you should expect from 7 common business loans.
Business loan terms to know and costs to look for
Lenders may use several confusingly similar terms and acronyms when discussing your loan options and related fees. Go over the terms below so you can navigate the application process easily and understand the true cost of your choice.
- Annual interest rate (AIR): AIR is your yearly interest rate before any other borrowing costs, like origination fees, closing fees, and application fees.
- Annual percentage rate (APR): APR is your yearly interest rate, including any borrowing costs. As a result, a loan’s APR is typically higher than its AIR.
- Prime rate: Essentially, the prime rate is the interest rate that lenders charge their most creditworthy borrowers.
- Factor rate: Lenders typically use factor rates instead of APRs to determine interest payments for short-term loans and cash advances. Factor rates are expressed as decimals, such as a 1.4 factor rate.
- Origination fee: This fee covers the labor involved in processing a new loan. It may be included in a loan’s APR or not charged at all.
- Underwriting fee: This fee covers the cost of reviewing and verifying the documentation in your loan application.
- Closing cost: This fee covers work related to closing a loan, like a commercial real estate appraisal or business valuation.
- Prepayment penalty: This fee can be charged to borrowers who pay off their loans early.
- Late payment penalty: This fee can be charged to borrowers who miss predefined payments, or payments agreed upon ahead of time.
- Additional fees: Lenders may include other small business loan fees like check processing fees or nonrefundable application fees in your final loan costs.
Now that you know the payment terms to look out for, learn the average APR for 7 types of business loans and how each financing option stacks up.
7 types of business loans and their business loan rates
Below, we’ve covered direct lending options with financial institutions ranging from traditional big banks to up-and-coming alternative lenders. Compare the major types of business loans and rates, and then dive deeper into qualifications, overall costs, and repayment timelines with individual lenders.
1. Term loans
A term loan is the most common kind of business financing. Short-term loans must be repaid in a few months to a year while long-term loans can be repaid in a few years to over a decade. Your interest rate depends on the type of lender.
Traditional banks and credit unions
Average business loan rate: 4% to 13% APR
When it comes to term loans, traditional banks typically offer the lowest interest rates. It’s challenging, however, for new businesses with limited credit history to get approved. Businesses that are at least two years old, have a good business credit score, and earn positive cash flow receive the best loan terms.
Average business loan rate: 7% to 99.7% APR
The arrival of online-only lenders has made it easier for entrepreneurs to get early, fast funding. A business can be approved in weeks versus the months it would take with a high-street bank. Online lenders accept lower credit scores, but these term loans tend to carry higher costs and shorter repayment timelines. They’re best for founders who don’t want to wait for funding.
2. Small Business Administration (SBA) loans
SBA loans offer an affordable way for small businesses lacking collateral or credit history to secure financing with a variety of lenders. These loans are government-backed, which results in better interest rates. The SBA also offers a number of loan programs that support underrepresented communities. We’ll go over two general options.
Average business loan rate: 6.3% to 10% APR
The primary SBA loan program lets small business owners apply for up to $5 million with online lenders, commercial banks, and other institutions. You can use SBA loans for working capital, inventory, and more. The low APR and years-long repayment terms are big benefits. One drawback is that the approval process can take as long as three months.
Average business loan rate: 8% to 13% APR
Microloans are available to small businesses through nonprofit organizations that are partly funded by the SBA. The maximum loan amount is $50,000 and funds can be used for most business purposes, excluding debt refinancing and real estate purchases. Lenders can impose their own qualification rules on these loans as long as they don’t contradict SBA guidelines, so double-check your rates before signing off on one of these SBA loan packages.
3. Business credit cards
Average business loan rate: 15.37% APR
Business credit cards are essentially revolving lines of credit without the restrictions of term loans. Many cards have annual fees, significant APRs, and collateral requirements. By contrast, the Brex Ecommerce card offers a 60-day, interest-free credit limit up to $5 million, 10-20 times higher than competing corporate cards.
There’s no risky personal guarantee or lengthy application process. Brex bases your credit amount on your annual revenue and regularly assesses limits, so your spending power grows with your business. Your on-time payments are also reported to the two major business credit bureaus. This automatically boosts your credit score so you’re prepared for your next loan application.
4. Equipment financing
Average business loan rate: 4% to 40% APR
Equipment loans allow businesses in a variety of stages to purchase heavy machinery and other necessary equipment. Because the equipment serves as collateral for the loan itself, there’s often more flexibility with repayment terms. The loan’s life span is usually as long as the expected life of the equipment.
Although you may have to come up with a down payment, paying it could also lower your effective APR. If you’re scaling rapidly and can’t pay for equipment out-of-pocket, equipment financing lets you manage smaller monthly payments.
5. Business lines of credit
Average business loan rate: 8% to 80% APR
You can tap into a business line of credit for a variety of purposes — from buying inventory to paying ongoing business expenses. Similar to a credit card, you’ll receive a maximum credit limit ranging anywhere from $10,000 to over $1 million.
Interest only accrues on the funds you use, not your full limit, and the APRs are generally lower than corporate credit cards. Unlike a term loan, you can also access funds when you need them without worrying about recurring payments.
To open a line of credit with a good interest rate, you must have a healthy credit score and strong revenue. There are options for new businesses with a short credit history, but your APR will be higher.
6. Merchant cash advances
Average business loan rate: 20% to 250%
Merchant cash advances offer quick, lump sums, but have some of the highest borrowing costs of all financing options. With a cash advance, the lender advances money to your business upfront. In return, you agree to pay the lender a certain amount of your credit card income on a daily basis from a bank account. Advances can be used for a range of business purposes, but this daily withdrawal can also wind up reducing your cash flow.
You must repay the loaned amount as well as interest and fees, which is where cash advances become expensive. Interest accrues the moment you make a withdrawal. On the other hand, cash advances may be beneficial for riskier borrowers who are less likely to qualify for another loan option and need cash quickly. We should note that many cash advances use factor rates rather than APRs.
7. Invoice financing
Average business loan rate: 13% to 60% APR
Technically, invoice financing is not a business loan. Rather, it’s a way to borrow against your outstanding invoices. Essentially, businesses boost their short-term cash flow by selling unpaid invoices to factoring companies.
The invoices serve as collateral for a cash advance from the invoice factoring company, so you can get necessary funding, fast. Your business is still responsible for collecting payment from your customers. The high loan interest rate may be a deterrent for small businesses. However, this loan option is convenient because it can be completed online with a quick approval turnaround.
Finding a loan for your needs
As you can see, different types of business loans are suited to different goals and business qualities. Where you fall within the range of business loan rates will be determined by both controllable and uncontrollable factors, like the lender, loan type, current prime rate, time of year, and more.
If you’re an established business with a strong credit score, you’ll find it easier to get a favorable business loan rate. Businesses in need of funds as soon as possible will likely face higher interest rates.
Whether you’re increasing production, hiring aggressively, or simply trying to cover next month’s inventory, you can always work on improving your creditworthiness. Learn exactly how in our blog on how to get approved for a business loan.