Business Loan Interest Rates Explained

When comparing business loans, a key feature to think about is the interest rate, which is the amount you’ll need to pay back on top of the actual amount borrowed.

Jeff Salway, Rhiannon Philps Last updated on 23 June 2022.
Business Loan Interest Rates Explained

If you’re a business owner considering applying for a loan, you need to know about interest rates.

Interest rates tell you how much a loan will cost your business, so it’s important to understand how they work and what affects them as this will help you choose the right loan for your situation.

What are business loan interest rates?

When you take out a business loan, you’ll be given an interest rate. This is the amount you’ll need to pay back on top of the actual loan, so it tells you how much it will cost to borrow.

The higher the interest rate, the more expensive the loan will be to repay.

Many business loans will come with fixed interest rates. This means the interest rate, and your repayments, will stay the same during the course of your loan.

However, some business loans have a variable rate. This means the lender can change the interest rate during the term of your loan agreement, so your repayments could end up being more expensive, or potentially cheaper, than they started. Variable rates will typically change in line with the lender’s base rate, which itself is often influenced by the Bank of England base rate.

Generally interest payments on a business loan are a tax-deductible expense. However, capital repayments are not tax-deductible.

Interest is the main cost you’ll incur when you borrow money, although it may not be the only one. Other possible costs include set-up or arrangement fees and early repayment charges.

» MORE: How do business loans work?

Business loans and APR

When you look at business loans on lenders’ websites, they will show the cost of the loan as the annual percentage rate (APR). The APR is a percentage that tells you how much the loan will cost over the course of one year, taking into account the interest rate and any standard fees (such as arrangement fees).

Say you take out a five-year business loan of £100,000 with an APR of 7%. This means that you’ll be repaying around £18,807 in interest (and fees if applicable) as well as the £100,000 you borrowed, at monthly repayments of around £1,980.

The APR makes it easier to compare loans on a like-for-like basis, rather than trying to work out the total cost of a loan yourself by looking at the interest rate and fees separately.

You may see a business loan marked with a representative APR. This is an advertised rate that can be used if at least 51% of applicants will receive this rate or lower. The actual rate you will receive could be different. Once you’ve successfully applied for a business loan, the lender will provide more details on the terms of the loan and confirm the APR offered to you.

The interest rate you could qualify for will depend on a number of different factors.

What business loan rates could I get?

Several factors will affect the interest rate you could be charged on a business loan, including:

  • Your business credit rating: This tells lenders how you have managed credit in the past, so it can give them an indication of how big a risk you pose. If your business has a lower credit rating, you could face higher interest rates as you may be perceived as a greater risk by lenders.
  • Your business finances: When you apply for a loan, lenders will look at your overall business situation, including your revenue and trading history, to help them decide whether to approve your application and on what terms. If your business is well-established and in a strong financial position, you are likely to be viewed as a lower risk by the lender and may be able to access lower interest rates.
  • Whether the loan is secured or not: Secured loans typically come with lower interest rates than unsecured loans as the security the business provides, such as land or property, reduces the risk for the lender. Lenders are able to repossess the asset if your business fails to repay the loan.
  • The length of the loan term: Interest rates are typically higher for short-term business loans than loans with longer terms. However, you should check how much the loan would cost you overall, as borrowing over a shorter term (even at a higher rate of interest) could mean you pay less interest than borrowing at a lower rate for a longer period.
  • The type of loan: Certain types of business loans may have higher interest rates. For example, more flexible lending options, such as lines of credit, could be more expensive. However, the actual rate you are offered would depend on other factors too.

There are some things you could do that may be able to help you access lower interest rates on a business loan, including:

  • taking time to improve your business credit rating
  • offering security, whether that’s your property, a vehicle, equipment, or other high-value assets
  • borrowing over a longer period of time, but bear in mind that because you’ll owe the debt for longer so you could end up paying more interest overall.

How can I compare business loan rates?

When you compare the different business financing options available, you will need to consider factors such as the type of business loan, the length of the loan term, the amount you can borrow, and the representative APR.

However, remember that you’re not guaranteed to get the representative APR and you could be charged a higher rate when you go on to apply for the loan.

You can often check your eligibility for a business loan before applying. This allows you to see whether you would have a high chance of being approved for a loan, without affecting your business credit history.

» COMPARE: Business loan rates

Image source: Getty Images

About the authors:

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

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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