Business Loan Interest Rate Basics
When comparing business loans, the first feature to think about is usually the interest rate, which is the amount you’ll need to pay back on top of the actual amount borrowed.
Small businesses can have paper-thin margins, so it makes sense to keep on top of the different sources of finance available, even if the need for borrowing isn’t immediate.
One of the main options, particularly for smaller enterprises without shareholders or generous backers to call on, is a business loan.
When it comes to comparing business loans, the first feature to think about is the interest rate.
What are business loan interest rates?
When you take out a loan you’ll be given an interest rate, which is the amount you’ll need to pay back on top of the actual amount borrowed.
This is the main cost you’ll incur when you borrow money, although it won’t always be the only one. Other possible costs include set-up or arrangement fees and early repayment charges. You will usually see the interest charge advertised as the APR (annual percentage rate), which includes the interest rate as well as other standard charges you’ll have to pay.
For example, say you take out a five-year business loan of £100,000 with an APR of 7%. This means that you’ll be repaying £18,199 in interest (and fees if applicable) as well as the £100,000 you borrowed, at monthly repayments of £1,970.
How do business loan interest rates work?
Business loans are similar to personal loans, but there are some important differences.
For example, business loans can be offered over much longer terms – sometimes up to 30 years. This can make monthly repayments more affordable but you are likely to pay more interest overall.
While personal loans are usually unsecured, business loans may need to be secured. This is where an asset – usually a business property - is put up as security that the lender can sell if for some reason the loan isn’t repaid. Lenders can ask the business owner or director(s) to put their own property up as collateral, particularly where the business is still new.
They may also ask what the loan will be used for, as this may influence the lender’s borrowing decision and the rate charged.
Most small business loans have fixed rates, where the interest charged on the repayments stays the same throughout the term, but variable rates, where the repayments could change over the term, are sometimes available.
What does a business loan APR mean?
The APR is the Annual Percentage Rate at which you’ll repay the loan. This gives you the real cost of borrowing, as it includes the interest rate as well as the other standard charges you’ll have to pay.
But the APR that’s advertised won’t necessarily be the one you’ll pay, as the exact rate you’re charged will depend on factors including the length of the loan, the amount borrowed, the type of business and the level of risk the lender believes you represent.
The risk level will be dictated partly by the company's credit score – the worse the credit history, – the higher the interest rate is likely to be.
The precise loan interest rate you pay will depend on numerous factors.
How can I compare business loan rates?
It is quick and easy to compare business loans. You can search by features such as the length of the term you’re looking for, the type of loan, the amount you want to borrow and the APR.
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Don’t forget that there are several different types of business loans to look at when you’re shopping around, including secured and unsecured, credit facilities, P2P loans and the various temporary loans available for businesses needing help getting through the coronavirus crisis.
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Jeff is a freelance journalist who writes across finance & business. He was the personal finance editor at The Scotsman & Scotland on Sunday & a member of the Financial Services Consumer Panel. Read more