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Low Interest Business Loans

Business Loans with Low Interest Rates

Low interest business loans aren’t available to everyone – you’ll need a good credit score, solid finances, and be able to show you can pay the loan back. Here’s everything you need to know about finding the best interest rates on business loans.

Table of Contents

Business Loans with Low Interest Rates
What is a low interest business loan?
How to get the lowest business loan interest rates
Am I eligible for a low interest business loan?
How to get a low interest business loan through NerdWallet UK
Can I get a low interest loan with bad credit?
Alternatives to low interest business loans
Low interest business loan FAQs

What is a low interest business loan?

Low interest business loans aren’t exactly a specific product. Instead, it usually means any type of business loan where the interest rate or APR (annual percentage rate) is low compared to other options.

The APR reflects the total yearly cost of your business loan, factoring in the interest rate as well as any applicable fees and charges. Generally speaking, loans with lower interest rates are available to businesses that present the lowest risk to the lender – which means their credit is good, finances are strong, and they can demonstrably afford to pay it back.

» COMPARE: Compare best business loans

What is the average small business loan interest rate?

There’s a great deal of variation in interest rates for small business loans, depending on the type of loan, the amount borrowed, your business’s credit history – and whether the loan is secured or unsecured.

For example, rates for unsecured business loans typically range from around 6% to 15%, while secured business loans might offer better rates that start as low as 4%.

You can expect to pay higher rates of interest, plus additional charges, for other types of business borrowing, such as merchant cash advances and invoice finance.

» COMPARE: Small business loans

How to get the lowest business loan interest rates

Lenders take several factors into account when setting your interest rate. This is to help them understand how likely you are to repay the loan in full and on time, also known as your risk profile. The lower your risk profile, the more likely you are to qualify for low interest rate business loans.

Here are some steps you can take to boost your chances of getting a low interest business loan.

Improve your credit score

A stronger business credit profile will generally give you more options and lower borrowing costs. You can improve your business credit score by:

Filing full accounts with Companies House and HMRC.
Use your business bank account regularly to show turnover.
Have enough money in your business account to cover payments due.
Ensure you pay your bills on time and in full.
Pay your suppliers on time, as they can share information about your payment record with credit reference agencies.
Ensure all your registered information is up to date with customers, suppliers and Companies House.
Avoid frequent applications for new credit or loans, as it can suggest that your business is struggling financially.
Borrow sensibly and repay in full to demonstrate good financial habits.

In some cases, particularly for smaller companies, startups and sole traders, you might be asked to provide a personal guarantee when applying for a business loan. In this case, your own personal credit score may also be checked, so it’s wise to take steps to improve this, too.

Prepare your paperwork

When you apply for a business loan, your lender will want to see evidence that your business can afford the repayments. They’ll commonly ask to see bank statements, proof of business turnover and financial performance, and sometimes even forecasts and a business plan – so it helps to have these prepared in advance.

If you can show forecasts that demonstrate your business’s good financial health and ability to repay what you borrow, your lender may offer you an improved interest rate.

Offer your business assets as security

Secured loans are an option If you have valuable business assets you’re willing to offer up as collateral for your loan. This can help you get a lower interest rate than you’d otherwise get without security.

Secured loans are usually easier to qualify for, particularly if your business has a poor credit score or you haven’t been trading for long. This is because the asset gives lenders more confidence that they can recoup the funds if repayments aren’t made. Crucially, this also puts your assets at risk, so make sure that the repayments are affordable before you apply.

Shorten your loan term

The longer you borrow for, the longer you’ll be paying interest and the more it will add up. Shorter loan terms may make your monthly repayments higher, but it can mean paying less interest overall, reducing the cost of the loan itself.

Repay your loan early, if there are no fees

Lenders will often let you repay your loan early, which can reduce the amount of interest you pay overall. However, some charge an early repayment fee, so check to see if this will cancel out the savings you make. Some lenders may offer early repayment without fees on certain types of business loans, for example variable rate or secured loans, while charging fees on fixed rate or unsecured loans.

Fixed vs variable rate

A fixed interest rate on a business loan stays the same throughout the entire loan term, while variable rates can rise and fall in line with other market factors, including the Bank of England base rate.

The benefit of choosing a fixed rate is that your loan repayments stay predictable, so you’re protected from any unexpected changes in interest rates. Although you’ll be safe if the interest rate rises, this means you won’t be able to take advantage of drops in the Bank of England base rate, as you might with a variable rate loan.

It’s also worth mentioning again that fixed rate loans are more likely to have fees for early repayments, compared with variable rate loans.

» MORE: Business loan calculator

Am I eligible for a low interest business loan?

To be eligible for the lowest interest rate business loans, most lenders will want to see a strong turnover and cashflow, a solid credit profile, and clean financial records. You can give yourself a better chance of getting a lower interest rate by choosing a secured loan and offering an asset as collateral – just make sure you’re aware of the risks.

In general, to be eligible for business finance you’ll usually need to be over 18 and your business must be registered in the UK.

How to get a low interest business loan through NerdWallet UK

In three short steps, we can help you find the best low interest business loans – without affecting your credit score.

Tell us about your business: share a few details so we understand your needs.
See your matched lenders: view low interest business loans from our panel of lenders that your company is most likely to qualify for.
Compare and apply: choose a loan and apply directly with pre-filled details.

» COMPARE: Low interest business loans

Can I get a low interest loan with bad credit?

If your business has a poor or limited credit history it is more challenging to get a low interest business loan as it’s harder to qualify for the best rates. Offering an asset as security can help lower your interest rate, but if borrowing costs are still high you may want to consider alternative options.

Alternatives to low interest business loans

Invoice finance

Invoice financing lets you raise funds against unpaid invoices, with some lenders offering up to 90% of your unpaid invoice value up front. It works in different ways, depending on the provider you choose and type of product you take out, but invoice financing can be a good short-term funding option for businesses that have B2B customers.

» COMPARE: Invoice finance

Asset finance

Asset finance lets you spread the cost of equipment, machinery or vehicles across monthly payments. Ultimately, you either own the asset at the end when the repayments have been made, or effectively lease it from the lender. This can help preserve cash flow as an alternative to getting a low interest rate.

» MORE: Asset finance

Merchant cash advance

Merchant cash advances are designed for businesses who take frequent card payments: you take out a loan and repay it as a percentage of your card sales. Your monthly repayment amount increases or decreases in line with your sales, which gives some flexibility – but the overall cost of borrowing can be higher.

» COMPARE: Merchant cash advances

VAT loans

VAT loans are specifically for businesses that want to spread the cost of their quarterly VAT payments to HMRC. A VAT loan can help protect your working capital as you don’t have to pay the full lump sum, but you’ll face interest and potential fees as with any other loan.

» COMPARE: VAT loans

Interest rates vary by providers and depend on the type of loan and your creditworthiness. As a general rule, secured business loans – where you use a business asset as collateral – offer the lowest rates, while other forms of finance, such as merchant cash advances and invoice financing, are more expensive ways to borrow.

This isn’t common among commercial lenders but there may be some regional or government-backed loans that offer low or interest-free periods. Bear in mind that some providers offer ‘interest free’ financing but charge transaction fees instead. For short-term borrowing, you could avoid paying interest when you use a business credit card, provided you repay the amount you’ve borrowed in full before your next statement date.

The interest rate you’re offered depends on several factors, including the loan type, your credit score, cashflow and turnover, and whether the loan is secured or unsecured.

Improving your credit score increases the likelihood of being offered the best rates, so focus on reducing existing debt, making payments on time and keeping clean, audited accounts.

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