Editor's choice: SmartBiz
- Large network of SBA lenders
- Low potential APR
- Loans from $30,000-$5,000,000
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The typical rate on a small business loan is 6% to 60% APR
You might have known that your revenue, credit score and time in business are all important factors in which rate you end up with on a business loan. But the type of loan and lender can also impact the rate you get.
Since some business loans come with fees rather than interest, let’s take a look at how APRs compare for different loan types:
|Type of loan||Typical APR|
|Online term loan||7% to 99.7%|
|Bank term loan||4% to 13%|
|Line of credit||8% to 80%|
|SBA 7(a) loan||6.3% to 10%|
|Merchant cash advance||20% to 250%|
|Invoice factoring||13% to 60%|
Based on rates alone, term loans are the most competitive type of loan out there — although rates can get as high as 99.7% APR if you borrow from an online lender. Short-term financing options that don’t typically come with interest like merchant cash advances and invoice factoring tend to be more expensive than the competition.
Here’s how interest rates from different types of lenders compare:
|Type of loan||Typical interest rate|
|Online lenders||13% to 71%|
|Big national banks||2.55% to 5.14%|
|Small national banks and regional banks||2.48% to 5.40%|
|Foreign banks lending in the US||1.45% to 5.66%|
As you can see, online lenders tend to offer higher rates than banks. In fact, the maximum rate on all three types of bank loans is several percentage points lower than the minimum rate for online lenders.
There isn’t much difference between different types of banks: Foreign banks might have a typically lower starting rate but it they also end slightly higher. However, it’s often easier to get approved for a business loan at a local bank than a large national or international bank.
|SmartBiz||4.75% to 7.00% APR|
|Lendio||Starting at 6% APR|
|LendingClub||9.77% to 35.98% APR|
|OnDeck||Starting at 9.99% Annual interest rate (AIR) on term loans, 13.99% APR on lines of credit|
|DealStruck||Starting at 9.99% APR|
|Bolstr||8% to 25% APR|
|Bond Street||8% to 25% APR|
|Citizens Bank||As low as 4.75% APR|
|Accion||10.99% to 22% APR|
|Credibility Captial||8% to 20%|
|The Business Backer||As low as 5% APR|
There is no one “good rate” for everyone. It depends on what type of financing you’re looking for and also what rates you and your business are eligible for. The more of a risk lenders consider you, the higher the rate you’ll qualify for.
Typically, business loans backed by some kind of collateral or personal guarantee have lower rates because they’re less of a risk to the lender — SBA loans have such low rates because they’re partly backed by the government.
How long you take to pay back your loan also typically affects the rate. Long-term loans and lines of credit tend to have more competitive rates than short-term business loans because there’s more time for interest to add up. Lenders who offer the lowest rates like banks generally only offer long-term loans
Generally, you’ll need to meet the following requirements to get a competitive rate on a business loan:
It depends on what you mean by “rates.” There are a few different types of small business loan rates you might come across: Interest rates, APR and factor rates.
An interest rate a percentage of your loan balance that a lender charges on a regular basis. Most business loans come with an annual interest rate (AIR), which means that that percentage applies to the loan balance over a year. However, some short-term loans come with a monthly percentage rate that applies to the balance once a month.
There are two main types of interest rates: Fixed an variable. There are also two main that lenders apply interest to your loan: Simple interest and compound interest.
Fixed interest is an interest rate that stays the same while you pay back your loan. It’s less risky than a variable rate and makes repayments more predictable.
Variable rates are subject to change, usually every month or quarter. Lenders calculate your variable rate by first give your business a fixed interest rate called a margin rate. It then adds your margin rate to what’s called a benchmark rate, which is set by a third party every month or three months to reflect trends in the lending market.
Benchmark rates are based on the lowest interest rates that lenders are charging borrowers. The LIBOR rate and Wall Street Journal prime rate are two of the most common types of benchmarks rates.
Simple interest is, well more simple than compound interest. You can calculate how much you’d pay on a simple interest loan with this formula:
Principal x interest rate x loan term (in years) = Simple interest
Compound interest takes a little more number crunching to calculate. That’s because lenders charge interest on the loan principle, plus any unpaid interest that has accumulated since your last payment. Some lenders compound interest on an annual, monthly, weekly or even daily basis. The more often your loan compounds, the more you’ll end up paying in interest.
You can use this formula to figure out how much you’ll pay with a compound interest loan:
Interest rate x principle = Interest on first repayment
Interest rate x (Principle + unpaid interest) = Interest for each following repayment
A loan’s APR is an expression of interest and fees as a percentage that applies to your loan per year. Lenders often advertise the loan’s APR, instead of its interest rate alone. That’s because it’s a more accurate picture of how much your loan will cost.
When comparing APRs, make sure you’re also comparing loans with similar terms and amounts. A loan with a 100% APR and six-month term might actually cost less than a large loan with a 5% interest rate and a five-year term.
If you’re looking at merchant cash advances and some other short-term term loans, you might get quoted a factor rate instead of an interest rate. Rather than a percentage, lenders typically quote factor rates as a decimal, usually between 1.1 and 1.5. Some lenders also quote factor rates as “cents on the dollar” — usually between 10 and 50 cents on the dollar.
Here’s how it works:
Factor rate x loan amount = Loan cost
Unlike interest or APR, factor rates show you a fixed cost that doesn’t change over time. That means that you can’t save on your loan by paying it off early. Typically, loans that come with factor rates have a higher cost than loans that come with interest.
Interest rate is based off your business’s risk to the lender. Smaller businesses with few valuable assets and a small annual turnover will likely pay a higher interest rate than a more established business.
Lenders will judge each business individually based off a few common markers.
While rates are an easy way to compare, they can be misleading. Even if you’re comparing a loan’s APR. That’s because it doesn’t tell you when you’ll have to pay that fee. These are some common fees you might run into when you’re taking out a business loan.
|Fee||Typical range||When it applies|
|Origination fee||1% to 6% of the loan amount||When your lender disburses your funds, either added to your loan amount or deducted from your funds before you receive them.|
|Referral fee||Varies||If you take out a loan by using a connection service.|
|SBA guarantee fee||0.25% to 3.75% of the guaranteed portion of the loan||When your lender disburses your funds, either added to your loan amount or deducted from your funds before you receive them. Some borrowers qualify for a waived guarantee fee.|
|Late fee||Either between $10 to $35 or 2% to 5% of your loan amount||After you’ve missed a payment. Many lenders have a grace period of around 15 days before the late fee applies.|
|Nonsufficient funds fee||$15 to $35||Whenever your business’s bank account doesn’t have enough funds to cover the payment.|
On top of fees, there are other factors that you might want to consider when considering a loan:
There’s no one size fits all rate on a business loan. But knowing the general range of rates you can expect on a type of loan or from a specific lender can help you narrow down lenders. To learn more about how business loans work, check out our guide.
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