Low-interest business loans

Top 5 low-interest business loans

What’s considered low interest for a business loan?

Any business loan with an annual interest rate (AIR) of 3% to 10% is considered low interest, depending on where you borrow from.

However, it’s more common for lenders to display annual percentage rates (APR), which also include fees. APRs of 6% to 15% APR could be considered low.

What other costs should I consider?

The fees you’ll pay in addition to your APR depend on the lender and type of loan you’re applying for. Carefully read the fine print of your contract to avoid these costs taking your business by surprise.

• Origination fee

  Most business loans come with an origination fee, typically from 1% to 5% of the amount you’re borrowing. The lender deducts this fee from your loan amount before your business gets its funds.

  Factor any origination fee into your plans so that you aren’t left short. If you borrow $5,000 with a 1% origination fee, for instance, your business repays the $5,000 but receives that amount less the fee — or $4,950.

• Processing or underwriting fee

  Some lenders charge a flat fee of up to $100 to process your application, while others calculate the fee as a percentage of your total loan amount.

• Appraisal fee

  For a secured business loan, you might also pay for an expert to appraise the value of your business assets.

  Costs vary widely depending on the asset. Real estate can easily set your business back $300 to $500, while a car evaluation could be free.

• SBA guarantee fee

  If your business is applying for a government-backed loan, you may need to pay a fee on the funds amount the SBA guarantees — typically 75% to 80% of the loan amount. The SBA charges a fee based on the guaranteed portion, not the gurarntee

  How much you pay depends on the amount the SBA guarantees on your loan and your loan term. Terms of 12 months or more come with the following fees:

  • $150,000 and under — 2%
  • $150,001–$700,000 — 3%
  • $700,001–$1 million — 3.5%
  • $1 million or more — 3.5% up to the first guaranteed portion worth $1 million, 3.75% of $1 million and up

  Loans with a term of less than 12 months come with a 0.25% fee on the guaranteed amount, regardless of how much you borrow

How do I qualify for a low-interest loan?

The lowest interest rates typically go to applicants with the strongest credit, which means a select few qualify for the strongest rates.

When deciding on your rate, business lenders often consider:

• Time in business. The longer, the better — especially if you’re borrowing from a bank or credit union. Generally, your business should be at least a year old.
• Personal credit score. Business owners typically need good to excellent credit to qualify for a low interest rate. The higher your credit, the lower the rate you’ll qualify for.
• Revenue and cash flow. Lenders want to see that you consistently make enough money monthly or annually to easily afford a loan repayment. Businesses with positive cash flow typically have an easier time qualifying for a low-interest loan.
• Debt load. High revenue doesn’t mean much if your business has several debt obligations already. You should be able to prove that you can easily afford additional debt.
• Industry. Lenders often consider industries like trucking and health care high risk. Risky industries can have a hard time qualifying for a loan at all, let alone a competitive rate.

Business loan requirements you’ll need to meet

Which types of providers offer the lowest interest business loans?

The lender you choose can affect your loan’s interest rate. Start your search for a low-interest business loan with the following types of lenders.

• SBA lenders

  Government-backed loans are a popular choice for small business owners looking for a competitive rate. APRs on loans from the SBA’s 7(a) program can range from 6.30% to 10% — solidly low interest rates. Loan amounts go up to $5 million, depending on the program.

  The downside to Small Business Administration loans is that they come with a long, complicated application. Services like SmartBiz are available to take care of the most difficult parts.

  SBA loans also have some of the highest rejection rates: Only 55% of SBA applicants were approved in 2016, according to a survey by the Federal Reserve.

  How SBA loans work

• Banks

  Banks often offer business loans with low rates ranging from 4% to 13%. They are a solid option for established businesses looking to fund big, complicated projects, like purchasing real estate or acquiring business.

  Young businesses and owners with low credit might find it hard to qualify with a bank. Bank loans can also take several weeks and work hours for approval, which isn’t ideal for emergency expenses.

  To improve your odds of approval, you might also want to stick to that bank around the corner. In 2016, small regional and national banks came in at higher approval rates than large banks.

  Compare five top banks for small businesses

• Online lenders

  Online lenders tend to offer low-interest business loans with APRs that start at 7%. They can also go as high as 100% APR.

  Borrowing online isn’t always cheaper than your local bank either. But digital lenders tend to offer wider ranges with more flexible eligibility criteria. Online lenders also tend to turn around your loan faster, with a few advertising funds the next business day.

  The application often takes only a few minutes, making it a decent option if you don’t have time to head to the bank.

• Credit unions

  Credit Unions are nonprofit financial institutions owned by its members. As a result, many offer lower rates and fees, more flexible eligibility and small amounts than big-name banks.

  You’ll typically need to join the credit union to qualify for a loan, however. And it can take a couple of weeks to get your funds.

• Community development financial institutions

  These mission-driven financial institutions approved more loans in 2016 than any other financial institution. CDFIs are designed to provide affordable financing to small businesses in low-income communities — including low-interest business loans. The goal is to promote economic development in these areas.

  A CDFI can be a local bank, credit union or nonprofit lender in an underserved areas. What makes them a CDFI is registration with the Department of Treasury’s CDFI Fund.

  If your business serves an economically disadvantaged area, a CDFI could be a helpful low-interest financing solution.

4 tips to qualify for a lower interest rate

1. Put up collateral. Securing your business loan with an asset reduces the risk for your lender, making it more likely to approve your business for competitive rates.
2. Bring on a cosigner. Don’t have great credit? Ask a creditworthy relative or friend to cosign your business loan, minimizing the lender’s risk and maximizing your chances of a low rate.
3. Build your credit score. A long-term solution to a poor credit score is working to build or rebuild it. You’ll find many ways to increase your credit, including strategically paying off your debts and even just reviewing your credit report for errors.
4. Wait. Don’t need to expand just yet? The longer you’re in business, the more likely you’ll see approval for a low-interest loan.

Compare low-interest business loans now

Low-cost alternatives to business loans

If you’re not yet sure about your business taking on a loan, look into alternative sources of funding to meet your needs.

• Business grants

  Business grants are a popular financing option for nonprofits, which can find it hard to qualify for business loans. But the government and private foundations also offer grants for small businesses, usually with the aim of promoting a demographic of business owners or serving a charitable cause. Women, minorities and veteran business owners in particular might want to research this option.

  Where to find and how to qualify for a business grant

• Crowdfunding

  Startups and businesses looking to fund a one-time project might want to turn to crowdfunding sites. You’ll typically pay a percentage of the funds you raise as a platform fee. And some crowdfunding sites won’t give you anything if you don’t reach your goal. When successful, however, crowdfunding is a low-cost source of financing.

  Crowdfunding for small businesses

• Equity investments

  Another alternative to business loans is pitching your business or project to venture capitalists or angel investors. If they think it’s viable, they offer funding in exchange for a percentage of ownership.

  How business loans and equity investments compare

• Personal loans

  Got good credit but not enough time in business? A personal loan might be the low-interest solution you’re looking for. Personal loans depend entirely on your personal credit and often start at lower rates than business loans. In fact, they’re capped at 36% in most states, while business loan rates can easily shoot to 100% or more. Personal loans are also often available in smaller amounts.

  Find a low-interest personal loan

Bottom line

Low-interest business loans can save your business money. But not every business can qualify — typically the lowest rates are for businesses and owners with an established sales record and credit history. They also can be hard to find if your business needs money quickly or doesn’t have the time to invest in applying with a bank.

To learn more, read our guide to business loans.

Frequently asked questions

• Can I get a low-interest loan to start a business?

  It’s not likely. Your time in business and revenue are important factors for business loan approval. But if you have excellent credit, you might find a personal loan with a low interest rate.

• Are small business loans hard to get?

  They can be. If your business is in what lenders consider a high-risk industry, you might have a hard time being approved for a business loan at all. Businesses that aren’t yet a year old, with spotty cash flow or owners who have bad credit can also have trouble getting a business loan.

  It also depends on which lender you apply with. In 2016, CDFIs approved 88% of businesses that applied for financing, while SBA lenders approved only 55%.

• How much of a down payment do I need for an Small Business Administration loan?

  SBA lenders typically require a 10% down payment or “injection” on their business loans.

• What do I need to apply for a small business loan?

  You’ll likely need to submit at least three months of business bank statements, business and personal tax returns and records of credit card sales. But different lenders and types of financing require different documentation.

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