Small business owners often seek loans to help start or grow their companies. Invoice financing and equipment financing loans offer the working capital organizations need to pursue their core objectives and optimize their cash flow when their funds are restricted. However, repayment terms and loan interest rates on a business loan can significantly impact your financing options.
Keep reading to learn what to expect from business loan interest rates and how you can secure the best loan terms for your company.
The average business loan rate depends on the type of business loan, your lender, and whether you meet the eligibility requirements. Choosing the right lender for your loan needs requires careful research and preparation. You should have all the necessary documentation ready to hand over and be prepared to explain your intended purpose, credit score, and business history to your potential lender. Before you make a final decision, you should completely understand the loan, from the loan amount and terms to any possible fees and prepayment penalties.
Key factors that can impact your business loan interest rate include:
Your past and current financial situation is often a solid indication of your ability to repay a loan. A lender may ask you for documentation and an explanation about your financials, including your annual revenue, profitability, and cash flow.
You should also be prepared to walk your lender through your short- and long-term business goals, detailing how you plan to spend the funds if approved. Create a business plan that outlines your strategy and demonstrates intentions for the funds. If your lender considers you a high-risk borrower, you may receive a high business loan interest rate.
The amount of time you’ve been in business also indicates your reliability as a borrower. Small business owners who have been active for less than two years can be considered risky because they don’t have the collateral, credit history, or working capital a more established organization may have. Some lenders who do work with younger businesses tend to offer loan amounts at higher rates than usual, so long as you meet the eligibility requirements.
Lenders evaluate your personal and business credit during the application process. New business owners should be prepared to have their personal credit surveyed if they have not had the time to build substantial business credit.
High credit scores lead to the best repayment terms with the lowest loan interest rate. In contrast, organizations with a lower score may either fail to meet the eligibility requirements and be turned away or be offered a loan amount with more restrictive terms. Traditional lenders like banks often accept businesses of 680 or higher, while online lenders accept scores in the 500s.
There are many types of business loans to choose from. Finding the best match for your company requires proper research and preparation. There are almost as many types of interest rates as there are financing options.
Here are a few of the most common types of business loan interest rates you may encounter during your search:
Annual percentage rates (APR) help show the cost of financing. The APR details the interest rate and all fees associated with the loan.
Annual interest rates (AIR) match the amount of interest owed year over year on a loan. They don’t include fees associated with the loan.
Business loan interest rates can be flat or fluctuating. Fixed-rate loan terms never change after approval and are most commonly associated with SBA loans, equipment financing, and 5-10 year term loans. The predictability of a fixed-rate loan makes them easier to budget for and keep on track.
Variable-term loans have interest rates that change over time. Variable terms are often included with business lines of credit, SBA loans, and purchase order financing.
Interest rates vary depending on your choice of lender and type of business loan. The average business loan interest rates in 2022 by type are:
Business Lines of Credit – 3% to 7%
Purchase Order Financing – 1.10 to 1.50 factor rate
Accounts Receivables Financing – 13% to 60%
SBA 7(a) Loans – Variable: 7.75% to 10.25% Fixed: 10.50% to 13.50%
You should pursue business loans that offer the lowest rate possible. The lower the loan rate, the less you’ll pay over the life of the loan. You should also consider the repayment term for your funds. For example, if you have a 10-year term loan at a low interest rate, you may still pay interest for longer than you would with a 5-year term loan with a slightly higher interest rate.
Be aware of any additional fees and lender charges that may increase your financing costs. Missing a payment can incur fees that impact your interest rate and may disrupt your budget. If you consider paying off your long- or short-term loan early, ensure no repayment penalty fees are associated with your agreement. The best business loan terms have low interest rates and feature little to no hidden fees. They empower your company to achieve your goals and improve your long-term financial standing.
Navigating the financial landscape is tough when you’re a small business owner with a full schedule. QualiFi is a financial company built by entrepreneurs for entrepreneurs. We know what it’s like to be a small business owner in today’s economy and have the tools and experience to help them thrive with structured and affordable financial solutions.
Our streamlined application process and diverse financial options provide quick and easy access to the funds you need. We help companies of all credit profiles get the rate they deserve.
Ready to fund your projects? Reach out today.