What to Know About Small Business Loan Interest Rates


For small businesses in need of working capital, taking out loans is imperative. But while a loan is essential to growing your business, it can sometimes be risky and create greater financial hardships for your company. Finding a lender for small business that offers an attractive loan option with competitive interest rates and manageable repayment terms is key.

With the right prior knowledge, you can access the funding you need and repay the money easily over time.

Current Small Business Loan Interest Rates

The most important thing to consider when applying for a loan is the interest rates the loan entails. Interest rates vary drastically, from no interest to over 500 percent. In addition to comparing interest rates, it’s important to analyze the repayment terms to ensure they work with your budget.

While a loan option may offer low-interest, if it’s a short-term loan, you’ll need to be able to create immediate returns for repayment.

Low-Interest Loan Options

  • Crowdfunding relies on pre-selling products and allows you to access startup funds at no interest. However, to repay the money, you need to be able to supply adequate products to investors within the arranged timeline.
  • Microloans offer interest rates of around 3 to 5 percent interest depending on the agency and your personal qualifications. Repayment terms are typically around 5 years, and eligibility is easier than with commercial loans, as they are geared to cater toward new entrepreneurs.

Financing Options With Moderate Interest Rates

  • Commercial bank loans provide affordable interest rates to applicants. Interest rates vary depending on eligibility but often hover around 3 and 6 percent. Repayment terms are long-term, often around five years, making it easy to repay over time.
  • U.S. Small Business Administration interest rates are negotiated between the lender and the borrower, but the average is between 7,5 and 9 percent, depending on the length of the loan.
  • Revenue-Based Loans are easy to repay because your repayment is based on a fixed percentage of your monthly sales. Loans are typically between 4 and 5 years, and the percent of income owed is largely contingent on negotiated rates. Basically, you negotiate a small percent of sales with the investor as a method of repaying the loan.
  • Private Equity Investors request a chunk of your earnings in exchange for their loan. However, they are investing in a share of the company, which means they’ll continue to profit off of your business throughout the years.

When applying for a loan, the option you choose needs to depend on your desired repayment terms as well as the interest rates. Shopping around to find the lowest possible interest rates can help you to save money long term. It’s important to weigh the interest rates with the repayment terms to find a loan option that is both cost-effective and easy to repay.

Top Factors That Affect Small Business Loan Interest Rates

Whether you have been in business for several years or are launching a start-up, your business requires funding to be successful and to thrive. But did you know that you might not be offered the same interest rate as the business next door?

Seeking a loan may be required to fund the new equipment, space, supplies or more employees required to reach your goals. But not everyone gets offered the same interest rate from their conventional lender.

Though banks advertise an interest rate to get you to apply, there are several factors that affect the interest rate you may actually receive.

Your credit history

If you lack a solid credit history and a good credit score, you may find it very difficult to even qualify for a conventional loan, never mind get a good interest rate. According to Forbes.com, most business owners don’t meet the tough lending criteria and those with low credit scores often must look to alternatives to the typical bank loan to get the funding support they require.

The type of business you have

There are simply some businesses that are considered riskier than others when it comes to getting a loan. Lenders, if they still approve you for a loan, feel this warrants a larger interest rate to make up for the risk. This is particularly true if you are applying for the loan for a new business rather than an already established business.

Your business plan

If you are lacking a detailed, solid, and comprehensive business plan, it can make a substantial difference when you apply for a loan, particularly if you are a new business. Your business plan is your way of demonstrating how serious you are about starting and maintaining this business venture and how well you plan for its future growth.

The financial institution will view this business plan as an indicator of whether they are making a wise investment.

Your length of time in business

This is not to say you can’t find a loan if you are a start-up business or have less than three years under your belt. But this does affect your interest rate and may prevent you from obtaining a bank loan. Conventional loans with lower interest rates typically require three years of proven history.

Small Business Loan Interest Rates by Loan Product

According to huffingtonpost.com, today’s small businesses are seeking alternative funding solutions, online, for short-term capital needs.

Sometimes you can find a loan through the Small Business Association (SBA) other times, it’s best to go through an alternative lending institution that offers a solution that fits your needs and limits your repayment risks, even if the loan rate is slightly higher.

The idea is that it’s better to get a loan you need with terms you can handle than to struggle with a loan product that does not fit your business.

The Small Business Administration (SBA)

The SBA is a government agency that provides small businesses with an array of financing, from the smallest needs in micro lending, to substantial debt and equity investment capital (venture capital). The SBA is not the actual lender, but rather connects you to one of their lending partners and then backs part of your loan with a guarantee.

They offer several types of loan products, like the 7(a) loans to eligible borrowers for starting, acquiring and expanding a small business. They also have the 504 loan program, which provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.

SBA is a good choice:

  • If you are focused on a low interest rate and have drafted a solid, comprehensive business plan
  • If you have good credit and personal financial history to back it up
  • If you have plenty of time to wait for the funding that can take up to 90 days

Alternative Lenders

Alternative lenders usually have several loan products available that meet the needs of today’s entrepreneur. Typically, the interest rates are slightly higher, but you stand a great chance at easy, straightforward approval on a great loan product that fits your needs.

Alternative lenders look at the overall health of your small business and what you have built takes priority in the application process. In other words, your credit score is usually not the primary focus. These companies often have the flexibility to tailor loans to meet the needs unique to your business. Applications are typically fast, easy and provide you the money you need quickly.

They also offer numerous funding solutions, including small business loans and business cash advances. A business cash advance is an unsecured advance on your future sales revenue to use today. It is paid back based upon a small, set percentage of your business’s daily credit card processing receipts. This means that payments are not a set amount but adjust as your business ebbs and flows, which is ideal for businesses that experience slow periods.

Alternative lenders are a great choice:

  • If your credit score is less than stellar
  • If you are overwhelmed by having to dig up a wealth of financial records and documentation
  • If you need funding simply and quickly
  • If you need a repayment plan that is reasonable and takes your business’ sales into account

When considering the many factors that can affect small business loan interest rates, it’s easy to feel overwhelmed. As a business owner, the terms of your funding solution are important to your success. Contact Credibly today to learn more about all of your funding options.

Or, fill out our online pre-qualification request form to get started. It’s free and easy and will not hurt your credit.

Plan for the future with Credibly.

We recognize the unique financial needs of your business. Although we don’t provide mezzanine financing, we’re equipped to help you assess if this is the right path for you.

Our commitment is to understand your business’s potential beyond just the numbers. We’re here to offer insights and guidance—not just financing.
If you’re considering your next financial move and wondering if mezzanine financing fits your growth strategy, let’s discuss your options.

With experience supporting over 30,000 businesses, we’re prepared to help you make an informed decision.

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