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Average Business Loan Rate: What to Know About Interest Costs
Understand interest costs and fees before you borrow to help choose the best loan option for your business.
Ryan Lane is an editor on the small-business team and a NerdWallet authority on student loans. He spent more than a decade as a writer and editor for student loan guarantor American Student Assistance and was a managing editor for publisher Cell Press. Ryan’s work has been featured by The Associated Press, USA Today and MarketWatch, and he previously co-authored the U.S. News & World Report Student Loan Ranger blog. Email: <a href="mailto:email@example.com”">firstname.lastname@example.org</a>.
Writer | Small business, business banking, business loans
Randa Kriss is a small-business writer who joined NerdWallet in 2020. She previously worked as a writer at Fundera, covering a wide variety of small-business topics including banking and loan products. Her work has been featured by The Washington Post, The Associated Press and Nasdaq, among others. Randa earned a bachelor's degree in English and Spanish at Iona College. Email: <a href="mailto:email@example.com">firstname.lastname@example.org</a>.
Sally Lauckner has over a decade of experience in print and online journalism. Before joining NerdWallet, Sally was the editorial director at Fundera, where she built and led a team focused on small-business content. Her prior experience includes two years as a senior editor at SmartAsset, where she edited a wide range of personal finance content, and five years at the AOL Huffington Post Media Group, where she held a variety of editorial roles. She has a master's in journalism from New York University and a bachelor's in English and history from Columbia University. Email: email@example.com.
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The average business loan interest rate ranges from 4.90% to 9.83% at banks, according to the most recent data from the Federal Reserve
The interest rate on a business loan is essentially how much a lender charges you for funding. Interest is usually expressed as a percentage of the amount you’ve borrowed — the higher the interest rate, the more money will be added to your original loan amount.
The lender.Bank small-business loans typically have the lowest rates but tough qualifications. Online lenders have looser eligibility requirements but cost more: Interest rates on some types of online business loans can range from 6% to 99%.
Your financial situation. The lender will look at traditional business loan requirements like your credit score, time in business and business income. If you appear to be a risky borrower, the rate you're offered will likely be higher.
Your collateral. Lenders may offer you a better rate if you secure your loan with business collateral, such as inventory or property. This reduces the lender's risk because it can seize these assets for nonpayment.
Other factors that may influence interest rates on business loans include market conditions, the total amount borrowed and the length of the repayment period.
Is a small-business loan a fixed or variable interest rate?
A small-business loan may have a fixed or variable interest rate. With a fixed-rate loan, the interest rate and monthly payment don't change over the life of the loan, making it easier to budget for repayment.
Lump-sum term loans typically have fixed rates. This type of loan is best for one-time business purchases and long-term financing needs, like funding a major business expansion, buying real estate or refinancing debt.
A variable-rate loan may carry a lower initial rate than a fixed-rate loan, but that rate can rise or fall because it’s tied to an underlying index that fluctuates with the market. This means your payments can vary, which can make budgeting tougher.
A business line of credit may come with a variable interest rate. It allows you to borrow money and pay it back continuously, like you would with a credit card. This type of loan is better for business owners who don’t need a set amount of money, but need easy access to cash, whether it’s for emergency funds or short-term working capital.
Business loan fees are often unavoidable and can make borrowing more expensive. Small-business lenders charge varying amounts for upfront fees depending on factors like the size of your loan, the length of the repayment term, your credit score and the type of business loan.
Here are some common fees that may be included with a small-business loan:
Origination fee. An upfront fee charged for processing a new loan.
Underwriting fee. Fees collected by underwriters who review and verify the documents you’ve provided, including financial statements, personal bank statements, credit reports and tax returns.
Closing costs. Fees associated with servicing the loan such as a loan-packaging fee, a commercial real estate appraisal or a business valuation.
SBA loan guarantee fee. SBA loans typically come with a guarantee fee of 0% to 3.75%, based on the size of the loan. Annual service fees may range from 0% to 0.55% depending on the size of the loan. The SBA evaluates and updates these fees every fiscal year
The best way to compare business loan rates is the annual percentage rate. It includes not just the interest rate, but also the associated loan fees mentioned above.
It's important to keep in mind, however, that not all lenders use an APR when quoting the cost of their products. Some lenders may give a simple interest rate — which doesn't include loan fees — that is charged on a monthly or weekly basis.
Short-term lenders and merchant cash advance providers, on the other hand, may charge a factor rate, which is multiplied by the amount of capital you receive to determine the total cost of your funding. Factor rates typically range from 1.1 to 1.5 — and often translate into high APRs.
You should always try to calculate these types of interest rates into an APR to get a better understanding of how much a loan costs. APRs also make it easier to compare products from different lenders so that you can make sure you're getting the best deal for your business.
Business loan interest rate example
For instance, let’s say you have excellent credit and get approved for a $50,000 business loan with a five-year term and an APR of 15%. On this loan, you’ll make monthly payments of $1,190 and pay a total of $21,370 in interest.
What if you shop around and get a loan offer with a lower rate? With an APR of 10%, your monthly payment would drop by $128 and you would save $7,629 in total interest costs, according to NerdWallet’s business loan calculator.