Small Business Loan Interest Rates: Your 2020 Guide

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Business Loan Rates: What You Need to Know

Business loan interest rates range from a low 3% from a traditional bank all the way up to 150% from alternative lenders. SBA 7(a) loans—one of the most affordable business loan products available—currently have loan rates ranging from 6% to 8%.

In this guide, we’ll break down the average business loan rates based on loan type and lender, as well as discuss how loan rates are determined and other fees that may contribute to your overall cost of debt—so that you have all of the information you need to decide what’s best for your business.

The Ultimate Guide to Business Loan Rates

Average Business Loan Interest Rate

The average business loan interest rate is difficult to define exactly. Because so many different lending institutions offer such a wide range of small business loan rates—and use so many different ways to express these rates—it’s tough to say what the overall average business loan interest rate is.

With business loan rates falling as low as 3%—the best rate small business banks can offer—and as high as 150%—which some cash advance companies can charge, however, it’s safe to say that the average falls somewhere in this large range.

This being said, as this is such a large range, it’s not very helpful when you’re trying to understand your financing options and determine what’s best for your business. Luckily, by breaking down these rates by loan type and by lender, you should be able to get a better sense of what the average business loan rates look like.

Rates by Loan Type

Although business loan rates can depend on a variety of factors, you’ll find that each type of loan product has a typical range in which interest rates typically fall.

On the whole, more traditional, longer-term products—like bank loans and SBA loans—will have the most affordable interest rates, whereas alternative products—like merchant cash advances and short-term loans from online lenders—will generally be more expensive.

Of course, average business loan interest rates will also vary based on your qualifications. The better your business’s qualifications, the more likely you are to receive lower rates.

This being said, here are ranges of interest rates (shown as an annual percentage rate or APR) for the most popular types of business funding on the market:

Average Business Loan Interest Rates by Loan Type

Loan Type Interest Rate
Traditional Bank Loans
3% to 6% APR
SBA Loans
4% to 13%
Medium-Term Loans
7% to 30% APR
Equipment Financing
4% to 40% APR
Business Lines of Credit
7% to 25% APR
Invoice Financing
10% to 60% APR
Short-Term Loans
10% to 80% APR
Merchant Cash Advances
40% to 150% APR

As you can see, and as we mentioned, traditional bank loans and SBA loans will offer the most affordable business loan rates. These products, however, will also require the highest qualifications and will be the slowest to fund.

Conversely, as the interest rate increases on a business loan product, the speed of funding increases and eligibility also becomes easier.

Rates by Lender

Just like your small business loan interest rates will vary based on the type of product, they’ll also vary based on the lender you’re working with. Once again, traditional lenders, like banks, will be able to offer the most affordable rates, but they’ll also require the highest qualifications and be the slowest to fund.

With alternative lenders, on the other hand, you’ll find that your rates will be more expensive, but their products will also be easier to qualify for and faster to fund. For this reason, working with online, alternative lenders is often a worthwhile option for newer or less qualified businesses.

This being said, here are approximate interest rates sorted by some of the top small business lenders:

Average Business Loan Interest Rates by Lender

Lender Interest Rate
 6.98% to 19.97% APR
3% to 30% APR
BlueVine (term loan and line of credit)
14% to 78% APR
12.9% to 29.9% APR
5.5% to 6% APR
8% to 20% APR
Credibly (working capital loan and merchant cash advance)
Starting at 23% APR
14% to 19%
Crest Capital (equipment financing)
Starting at 5%
As low as 6%
8% to 30% APR
Starting at 4.66%
11.67% to 36% APR
40% to 80% APR
Kabbage (line of credit)
24% to 99% APR
Lendistry (SBA loans)
6.25% to 11.25%
OnDeck (short-term loan)
9.99% to 99%
13.99% to 63% APR
Opportunity Fund
Starts at 4.99%
PayPal Loan Builder
25% to 50% APR
Factor fees starting at 1.11
7% to 39%
The Business Backer (short-term loan and merchant cash advance)
Factor rates starting at 1.19

As you can see, even amongst these lenders, the range of business loan rates spans widely. Once again, this is because your specific interest rate depends on a number of factors, such as your personal credit score, the age of your business, the business’s revenues and profitability, and more.

What Determines Loan Rates?

As we’ve discussed, although there’s a general range of average business loan interest rates that you can expect to see for each loan product and lender, the exact cost of a loan will vary from borrower to borrower.

Once again, as we mentioned, your business’s qualifications will affect the interest rate you receive—plus, the market and qualities of the business loan in question will also determine where the interest rates will fall.

Ultimately, loan underwriters will take a look at a host of factors together to determine just how risky it would be to provide your business with a particular type of business loan. From this risk determination, the underwriter will derive your small business loan interest rate. In short, the more risk you present, the higher your rates will be.

Let’s discuss some of the factors that loan underwriters will consider to get a better understanding of how your business loan interest rate will be determined.

    Market Prime Rate

    Many business loans, particularly SBA loans and bank loans, derive their rates from the market prime rate. The prime rate is the interest rate that commercial banks charge their most creditworthy customers.

    The federal funds rate—which is the rate that banks use to lend to one another—determines where the market prime rate falls.

    The SBA and lenders use the prime rate as a floor when setting the interest rate for an individual borrower. The riskier you are as a borrower, there farther away you’ll be from the current business loan prime interest rate.

    Personal Credit Score

    Not only does the strength of your personal credit score have an impact on what financing options are available to you in the first place, but it will also have a direct impact on the business loan rate you’ll end up qualifying for. Generally, borrowers with a credit score above 700 are granted the lowest interest rates.

    In essence, your credit rating proves how responsible you are with your finances. If your scores show that you’re a top-notch borrower, lenders will feel confident that you’ll pay your loan back in full and on time—and therefore, won’t charge you as high of an interest rate.

    On the other hand, if your credit score shows that you’re a risky borrower, lenders will have reason to believe that you might default on your business loan. To protect themselves in the event that this happens, they’ll charge a higher interest rate to compensate for the chance that they might not get all their money back in the end.

    Time in Business

    Again, your small business loan rate ultimately depends on how confidently a lender can say that you’ll repay the loan in full. This being said, the lender may see your business as more or less risky depending on how old it is.

    Lenders usually consider businesses that have been around for fewer than two years as a risky venture. For this reason, lenders often charge higher business loan rates for younger businesses.

    Your Business’s Financials

    The better your business is doing financially, the more likely it is that you’ll be able to pay back the lender.

    Lenders place a good deal of value on business revenue and profitability.

    Some lenders have revenue business loan requirements that you have to meet to be eligible for a loan, and the higher your business goes above that minimum, the lower your interest rate will be.

    Similarly, if your business is already profitable, that’s another reason for a lender to offer you a lower interest rate.

    Loan Repayment Term Length

    The term of your business loan will also have an impact on what your rate will be. Short-term loans have higher APRs, but you’ll pay less in total interest since you’re borrowing the money for a shorter period of time. Long-term loans are the opposite. They have lower APRs, but you’ll have more in total interest.

    If you have a genuinely short-term need for cash (e.g. covering payroll this quarter or buying supplies that you need urgently), a short-term loan might be a better value than a long-term loan. However, for genuine long-term needs like business expansion, a long-term loan will be better.

    Accessibility of the Loan

    Bank loans take a long time to fund, and they’re not easy to apply for or qualify for. You have to put together a lot of paperwork, and it can take several weeks or even months for the bank to process your loan.

    This being said, however, once the bank does their due diligence and finds you to be a trustworthy borrower, you’ll get lower commercial bank loan interest rates.

    Not every small business owner has the time to apply for a traditional bank loan—and not every business owner will even qualify for one, either. Luckily, alternative lending offers another solution.

    Non-bank lenders offer quick business loans that are easy to apply for. You can get the funding you need in days—without providing lots of information or putting up collateral for your loan. The catch is that in exchange for the ease and speed of your business loan application, lenders will charge high business loan interest rates.

Types of Loan Interest Rates

At this point, we’ve reviewed the average business loan interest rates based on different loan types and lenders, as well as how your interest rate will be determined.

This being said, however, it’s also important to understand the types of interest rates. Lenders will describe the cost of a loan in a few different ways, so you’ll want to understand what each of these terms means to ensure you know what the actual cost of your loan will be—as well as that you’re getting the most affordable financing for your business.

    Simple Interest Rate

    The most common way that lenders quote the cost of borrowing money is with an interest rate.

    At the most basic level, an interest rate is the amount that a lender charges—expressed as a percentage—on a loan’s principal.

    The interest rate is tied to time–lenders can quote a daily, weekly, monthly, or annual interest rate—but an annual interest rate is most common.

    There are two types of interest rates: simple interest rates and compound interest rates.

    Simple interest only takes into account the amount of money you’re borrowing, the yearly interest rate, and the term of the loan.

    Here’s a formula for simple interest:

    Simple Interest = Principal x Interest Rate x Duration of Loan (Years)

    For example, if you have a $100,000 six-month loan with a 20% interest rate, the simple interest would be $100,000 x 0.20 x 0.5 (because it’s half a year). This brings the simple interest to a total of $10,000.

    Compound Interest Rate

    Compound interest is more complicated.

    In this case, lenders charge interest on the initial principal plus on any accumulated interest. Loans can compound daily, weekly, monthly, or annually.

    Short-term lenders sometimes offer loans that compound daily, meaning that you’re responsible for making a payment every day that includes interest on the accumulated interest. This means you’ll pay more in interest by the end of your loan term.

    Here’s the basic formula for calculating compound interest:

    Principal x Interest rate = Interest for the first payment

    (Principal + Interest earned) x Interest Rate = Interest for the second payment

    (Principal + Interest earned) x Interest Rate = Interest for the third payment

    This formula continues for the number of payments that you have.

    Annual Percentage Rates

    Annual percentage rate (APR) gives you a more comprehensive look at what a loan will cost you.

    APR is the annual interest rate, including any fees you pay for borrowing (origination fee, application fee, closing fee, etc.). APRs also take into account the repayment term on your loan.

    Converting business loan interest rates to APR is the only way to accurately compare rates, so you should make sure you take the time to figure out what the APR on any loan will be.

    Factor Rates

    Factor rates are another way lenders quote business loan rates—and they’re a little different than typical interest rates.

    A factor rate is expressed as a decimal figure—usually ranging from 1.1 to 1.5. You multiply the factor rate by the loan amount to get the total cost of your loan. For example, if you have a $100,000 with a 1.3-factor rate, you’ll have to pay back $130,000 in total.

    The most important thing to know about factor rates: When a lender uses a factor rate, they charge all of the interest upfront when they originate your loan.

    In other words, a loan that has a factor rate isn’t a truly amortizing loan. Your loan cost won’t change even if you pay back the loan early or make more than the minimum loan payment. Generally, factor rates tend to be the most expensive types of business loan interest rates and are often seen with merchant cash advances and some short-term loans from online lenders.

    Other Cost Models

    Interest rate, factor rate, and APR are likely the three cost-related terms you’ll come across in the process of applying for a business loan.

    However, there are some other less common pricing models as well.

    For example, invoice financing companies use a discount rate, which is a weekly or monthly percentage that they assess either on the face value of your invoice or the amount that they advance to you.

    Learn more about invoice financing rates by using our invoice factoring calculator.

Fees That Affect Business Loan Rates

Ultimately, business loan rates are complicated—not only because lenders can express them in different ways, but also because they’re only one part of determining the actual cost of a loan.

Instead of looking at the simple interest rate, you’ll also want to consider any and all fees a lender might charge to figure out the total cost of the debt. As we mentioned, this is one of the reasons why calculating APR is so beneficial.

With this in mind, let’s take a look at some of the loan fees that might contribute to your total loan cost:

    Application Fee

    Some lenders charge an application fee for processing your loan application.

    Usually, part of the application fee covers the cost of a credit check. The application fee is generally not refundable, even if the lender doesn’t approve you for the loan.

    Guarantee Fee

    If you’re applying for an SBA loan, then you can expect to pay a guarantee fee. The lender must pay a guarantee fee to the SBA for every loan that it issues, and generally passes on this fee to the borrower.

    The SBA guarantee fee will depend on the dollar amount guaranteed by the SBA and your loan’s maturity. At a minimum, your SBA loan will have a 0.25% guarantee fee, and at a maximum, it’ll be 3.75%.

    Origination Fee

    Lots of lenders compensate for the time and effort they spend processing your loan with an origination fee.

    Origination fees might range from 1% to even 9%, but 1% to 2% is typical.

    Often times, the lender simply deducts this fee from your loan.

    For example, say you’ve applied for a $100,000 loan, and the lender charges a 1% origination fee. The lender might collect the fee upfront and disburse $99,000 to your account.

    Processing Fee

    Lenders might also quote you a processing fee or an underwriting fee.

    Typically, this type of fee is added to a business loan rate for administrative costs. These fees can be as high as 5%.

    Service Fees

    Once you’re approved for your loan and have the funds in your bank account, your relationship with your lender isn’t over.

    Your lender will bill you, collect repayments, offer customer services, etc.—and for these services, they might charge you a periodic servicing fee.

    Prepayment Fees

    A prepayment fee or prepayment penalty is a fee that a lender charges when you pay off your loan before it’s due.

    This fee compensates lenders for the interest they lose out on when you repay your business loan early.

    Although not all lenders charge these fees, a prepayment fee could range from around 3% to 5% of the loan’s principal amount. Sometimes, prepayment fees follow a sliding scale—the earlier you pay off the loan, the higher the fee.

    Closing Fees

    Closing fees include all of the above fees and other fees that lenders may charge when processing your loan. Depending on the type of loan, there may be other fees along with those above.

    For example, deed-recording and appraisal fees are common with commercial real estate loans.

Frequently Asked Questions

The Bottom Line

At the end of the day, the best thing you can do to ensure you get the most affordable business loan interest rate is to shop around.

Even if your credit isn’t great or you’re looking for startup funding, you shouldn’t assume that you can’t qualify for an affordable loan product.

As we’ve discussed, your interest rate eventually depends on a variety of factors—so by comparing the rates from multiple lenders, you can ensure that you’re getting the best deal for your business.

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Founding Editor and VP at Fundera at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. 

Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.

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