Average Business Loan Interest Rates in 2023
Average small business loan interest rates depend on a number of factors, such as business loan type, the individual lender and your personal qualifications as a borrower. In general, you could expect to see the following average range of annual percentage rates (APRs) based on loan type:
- Traditional bank loans: 6.75% or more
- Alternative, online loans: 3.49% – 30.12%
However, not all business lenders use APR to communicate interest. You may come across factor rates or annual interest rates when searching for a business loan. In addition, some lenders charge a weekly or monthly rate, which you could convert to an annual rate or APR.
Average small business loan interest rates by loan type
There are a number of financing options available to small businesses, and the interest rates can vary widely from loan to loan and lender to lender.
| Business loan type | Average interest rates |
|---|---|
| SBA 7(a) loans | Variable: Prime + 2.25% to Prime + 4.75% Fixed: Prime + 5% to Prime + 8% |
| Traditional bank loans | 4.76% fixed, 5.35% variable |
| Traditional bank lines of credit | 4.36% fixed, 5.58% variable |
| Online loans | 11% to 44% |
| Merchant cash advances | 1.10 to 1.50 factor rate |
| Invoice factoring | 13% to 60% |
Rates accurate as of Feb. 28, 2023.
As you can see, interest rates vary between types of business loans and lenders, plus your individual business details will also affect the interest rate you receive. Because of the number of factors that affect interest rates, you may not want to rely solely on average rates when searching for financing. Review all aspects of a business loan, including loan size and repayment structure, in addition to cost before making a decision.
SBA 7(a) loans
The U.S. Small Business Administration partners with financial institutions to provide loans to business owners who may not qualify for traditional financing. The SBA guarantees loans which reduces risk for lenders, making it easier to approve certain borrowers. Among several SBA loans is the 7(a) loan, the SBA’s primary lending program for small business owners.
Borrowers can use 7(a) loans for a variety of expenses, such as working capital, real estate, equipment and more.
The SBA sets a limit on the percentage of interest lenders may charge. SBA 7(a) loan rates are based on the prime rate, which is 7.75% as of Feb. 28, 2023. The SBA then caps the amount lenders can add to the prime rate, depending on the type of loan, loan amount and repayment term. Because of this cap, SBA loan rates are often competitive compared to other types of business loans.
SBA 7(a) variable loan interest rates
| Loan amount | Loans with a maturity under 7 years | Loans with a maturity 7 years or more | ||
|---|---|---|---|---|
| Rate standard | Variable rate maximum (with current 7.75% prime rate) | Rate standard | Variable rate maximum (with current 7.75% prime rate) | |
| $0 - $25,000 | Base* + 4.25% | 12% | Base + 4.75% | 12.5% |
| $25,001 - $50,000 | Base* + 3.25% | 11% | Base + 3.75% | 11.5% |
| $50,000 or above | Base* + 2.25% | 10% | Base + 2.75% | 10.5% |
- *Variable interest rate 7(a) loans are pegged to the prime rate, the LIBOR rate or the SBA optional peg rate.
According to the SBA, fixed interest rate 7(a) loans are based on the prime rate in effect on the first business day of the month of your loan.
SBA 7(a) fixed loan interest rates
| Loan amount | Fixed rate maximum | Fixed maximum allowable (with current 7.75% prime rate) |
|---|---|---|
| $0 - $25,000 | Prime + 8.0% | 15.75% |
| $25,001 - $50,000 | Prime + 7.0% | 14.75% |
| $50,000 - $250,000 | Prime + 6.0% | 13.75% |
| Over $250,000 | Prime + 5.0% | 12.75% |
Traditional bank loans
Banks are in the business of making money, so they have to be careful about who they lend money to. They tend to have strict eligibility requirements and may require good business and personal credit, usually two years in business, a business plan, financial statements, cash flow projections and collateral. Because of these high underwriting standards, traditional bank loans tend to have the lowest interest rate ranges — the bank is confident that it will get its money back plus some extra.
Online loans
Online loans are a type of loan that is funded by a lender without a brick-and-mortar location. It’s usually easier to qualify for an online loan than a traditional term loan, and they’re often available to borrowers with less-than-perfect credit. However, these flexible qualification guidelines mean online lenders typically offer higher interest rates than traditional lenders.
Business lines of credit
A business line of credit is a form of revolving funding that businesses can use over and over again. Similar to a credit card, the lender grants you a credit limit; you can borrow up to that limit, repay the amount borrowed and then borrow against the line of credit again. One of the advantages of a business line of credit is that you only pay interest on the outstanding amount.
Interest rates on business lines of credit vary depending on whether they come from an online lender or traditional bank, as well as whether they’re secured or unsecured.
Merchant cash advances
A merchant cash advance (MCA) allows a business to borrow a lump sum of money against its future credit and debit card sales. Rather than repaying the advance in monthly installments, the merchant cash advance company partners with the business’s credit card processor and withdraws a predetermined percentage of the business’s sales each day or week until the loan is paid in full.
Merchant cash advances charge a factor rate rather than an interest rate. The lender multiplies the amount of the advance by the factor rate to determine how much interest is due. For example, if you borrow $10,000 and the factor rate is 1.3, you’ll owe $13,000, including principal and interest. Factor rates tend to be high compared to interest rate ranges on traditional bank loans.
Invoice factoring
Invoice factoring is a type of financing where businesses can sell their accounts receivable (invoices) to a lender in order to get cash immediately. The factoring company collects the invoice from the customer, takes their fee out of the payment and then sends you the remaining balance. You can usually get anywhere from 70% to 90% of the value of your unpaid invoices advanced to you from the factoring company.
Factoring companies charge a factoring fee — either as a flat fee per invoice, or as a variable fee that increases if the invoice remains outstanding beyond 30 days. Invoice factoring tends to be more expensive than other forms of financing.
How do typical business loan interest rates work?
Business loan rates vary for different loan types, lenders and financing arrangements. However, there are a few variations of typical business loan interest rates that you may come across in your search for financing.
Fixed vs. variable interest rates
Interest rates for business loans can be flat and unchanging or fluctuate over time.
- Fixed rates: The interest rate doesn’t change during the loan term. Fixed rates are common with standard term loans, SBA loans and equipment loans.
- Variable rates: Interest rates are subject to change during the life of the loan. Variable rates are often associated with business lines of credit, merchant cash advances and SBA loans.
It may be easier to budget for fixed-rate loans, as your payments would be unchanging. Still, varying rates could potentially lead to an overall lower cost of capital. Consider how fixed or variable rates would affect your business before making a decision.
Annual percentage rates (APR)
Annual percentage rate (APR) is a commonly used measurement to show the cost of financing. Business loans, credit cards, mortgages and other forms of financing use APR to express interest. An APR on a business loan would include the interest rate and fees associated with the loan.
Annual interest rates (AIR)
Annual interest rate (AIR) reflects the amount of interest owed each year on a loan. Unlike APR, AIR does not incorporate any fees that may be associated with the loan. To find AIR, you would divide the total interest by your loan amount and the length of the loan term. In regard to business loans, AIR may be more helpful than APR when calculating the true cost of the loan as the balance decreases.
Factor rates
Unlike the rates listed above, factor rates are displayed as decimal figures, not percentages. Though not as common as APRs and AIRs, factor rates are typically associated with high-risk business lending products, such as merchant cash advances. A factor rate is not annualized, which may make it more suitable than APR for loans or cash advances with terms less than one year.
How much are loan fees?
In addition to interest and factor rates, many lenders charge loan fees to cover the costs associated with issuing and administering a loan. Some of these fees are negotiable, while other won’t be.
A few common types of loan fees include:
- Origination fee: A loan origination fee is a fee charged by a lender to originate a loan. This fee covers the costs of processing the loan, including underwriting, preparing and reviewing the loan application and making the final decision on whether to approve the loan. The loan origination fee may come as a flat fee, or as a percentage of the loan amount (with the latter usually ranging from 1% to 10%).
- SBA guarantee fee: A SBA guarantee fee is a fee that the Small Business Administration charges in order to guarantee a loan. The fee usually costs between 0.25% and 3.75% of the guaranteed portion of the loan.
- Servicing fee: Servicing fees are charged annually by some lenders to cover the costs of administering your loan. This includes things like customer service, billing and collections. As an example, for SBA 7(a) loans, annual service fees range from 0.49% to 0.55% of the guaranteed portion of the outstanding balance.
- Underwriting fee: An underwriting fee is a fee a lender charges for assessing and underwriting a loan application. The amount of the underwriting fee varies from lender to lender, but may be a flat fee or a percentage of the loan amount.
- Late payment fee: Lenders may charge a late payment fee if you make a payment past its due date. The fee may be a flat fee — usually anywhere from $10 to $39 — or a percentage of the payment amount.
Some fees, such as origination fees and underwriting fees, are included in the loan’s APR, though not all will be. Check with your lender to see which fees they’ve designated as APR fees, so you can calculate the full cost of borrowing.
What factors impact business loan average interest rates?
No matter what type of interest rate a lender assigns, there are general factors that could impact whether it’s high or low.
Credit
Small business lenders assess both personal and business credit when reviewing loan applications. If you have a newer business that has yet to build up business credit, a lender may heavily weigh your personal credit when making a decision.
A higher credit score generally leads to a lower interest rate. Most lenders require a minimum credit score to qualify for financing. Banks may look for scores of 650 or higher, while alternative lenders may accept scores in the 500s.
Business finances
Your business’s financial standing indicates your likelihood of repaying a loan, which would impact your interest rate. If a lender perceives you as a high-risk borrower, you would likely receive a higher rate. Be prepared to share information illustrating items like your revenue, cash flow and profitability.
Small business lenders may have certain revenue requirements, similar to credit scores. You may also be required to explain how you plan to spend loan funds, should you be approved.
Time in business
The amount of time you’ve been in business is also used as an indication of how risky you as a borrower may be. Businesses or startups that have been open less than two years are often considered risky because they typically lack capital, collateral or business credit.
Lenders may assign higher rates to these businesses to ensure they get their money back. However, if you don’t meet minimum time in business requirements, you may not be approved at all.
How to get your best business loan rates
The business loan rate you receive is often tied to the type of financing you choose to borrow. But there are a few ways to improve your chances of getting your best business loan rates.
1. Offer collateral
Some types of funding may require collateral, such as equipment financing or invoice factoring. Offering collateral when it’s not required could help you receive more favorable rates. When you provide collateral, you give the lender the ability to seize the assets you offered if you default on the loan. This reduces risk for the lender, and may reduce the amount of interest the lender charges. Loans secured with collateral generally come with lower rates than unsecured business loans.
2. Improve your personal credit
The higher your credit score, the less risky you may seem to a business lender, which could result in low-interest financing. Depending on your credit score, you may want to improve your credit profile before applying for financing. Some quick ways to build up your credit include:
- Paying down any existing debt, including credit card balances
- Making on-time or early bill payments
- Disputing any errors that currently appear on your credit report (you may be able to remove those errors as well)
3. Build your business credit score
In addition to solid personal credit, it’s important to keep track of your business credit report as well. While personal credit scores have a fairly standardized rating system, business credit scores vary depending on the company calculating the score. For example, Equifax creates three different numbers for small businesses: a business credit risk score, a business failure score and a payment index.
4. Establish a relationship with a lender
Lenders may give lower rates to borrowers they’ve worked with in the past. Both banks and alternative lenders may be more willing to approve your loan application if you’ve opened a deposit account with the institution. And if you’ve previously borrowed from the lender and made on-time payments, you could have a good shot at getting a second loan. Although circumstances and other factors could prevent you from borrowing and banking in the same place, it would be beneficial to do so, if possible.