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If you’ve started to look at options for business funding then you will know that average business loan interest rates vary considerably. Finding a loan with a good value interest rate will bring down your cost of borrowing and help with your cash flow.
In this study we take a look at average business loan interest rates. We also answer common questions like “how are interest rates calculated?” and “are interest payments tax deductible?”
Table of Contents
- What are interest rates?
- How do interest rates work?
- Which types of business loans are best for small businesses
- Which types of business loans are best for new businesses
- What business loans are fast to arrange?
What are interest rates?
Interest rates are usually stated as an annual percentage of an outstanding loan amount. They show how expensive it is to borrow or how much a lender will receive in return for lending money.
The Bank of England sets a base interest rate and this affects how much it costs lenders to borrow money. But lenders can set their own interest rates at a higher rate than the Bank of England base rate. Interest rates also vary significantly depending on type of loan and the risk profile of the borrower.
What factors affect interest rates?
Lenders take many factors into account when deciding interest rates. Most lenders have a standard variable rate but they also charge different interest rates to individual lenders depending on their circumstances.
Lenders will take many factors into account when deciding what interest rates to offer including the following:
- Your credit rating - if you have a good credit rating lenders will be more likely to lend to you at a lower interest rate. This is because your business is considered lower risk and less likely to default on a loan repayment.
- If your loan is flexible - having a flexible loan may increase your cost of borrowing and your interest rate. That’s because it costs more for lenders to administer a flexible loan.
- The length of your loan period - many lenders offer a lower interest rate on longer loan periods.
- The amount of your loan - lenders will assess the amount of your loan in comparison to your business profit and turnover. A larger loan with higher repayments is more risky for your business so lenders may charge a higher interest rate.
- Security offered on your loan - you are more likely to be offered a lower interest rate if you offer security or a personal guarantee on your loan.
What are average interest rates on business loans?
Interest rates vary considerably between lenders and depending on the type of loan and personal circumstances, but range from 2.6% up to 50% or more. For example, interest rates on business overdrafts typically range from % to 11%, business credit cards from 20% to 50% and business loans from 4% to 20%. Here are some typical interest rates for different types of business loans:
|Loan type||Description||Typical interest rates||Other fees and charges||Factors affecting interest rates|
|Bank overdraft||Variable interest payments depending on the amount outstanding.||7% to 11% per year||Overdraft fees may be a set amount or a % of the total borrowed.||Interest rates vary based on the amount borrowed.|
|Business credit card||Variable interest payments depending on the amount outstanding.||20% to 50% APR||Late payment fees, annual and monthly fees, foreign transaction fees, some cards offer reward points or cash-back.||Credit cards may offer lower interest rates if they have higher annual fees.|
|Secured business loan||Fixed and flexible interest rates available; interest only payments available.||4% to 20% APR||Late payment fees, arrangement fees, annual fees, early repayment fees.||Your credit rating and the value of the asset may affect interest rates.|
|Unsecured business loan||Fixed and flexible interest rates available; interest only payments available.||7% to 20% APR||Late payment fees, arrangement fees, annual fees, early repayment fees.||Your credit rating and the value of the asset may affect interest rates.|
|Asset finance||Can fund up to 100% of asset value.||From 2.6% APR||You may need to take out separate insurance to cover damage to assets.||Rates vary depending on the loan length and if you will own the assets at the end of the agreement.|
|Invoice finance||The lender gives your business a cash advance based on the value of your unpaid customer invoices.||Varies||Annual fees are often payable. Collection fees will be charged if the lender collects money on your behalf.||Lenders may take a cut from collected invoices, depending on your agreement.|
|Peer-to-peer lending||You borrow money directly from members of the public via an online platform, rather than using a traditional lender.||6% to 13% APR||Valuation fees if you are offering security.||Your credit rating and the financial health of your business may affect rates.|
|Start up loan||A government-backed loan for businesses trading less than 24 months.||6% APR||N/A||Fixed interest rate|
|Business line of credit||A flexible short term loan where you can withdraw money and repay it up to an agreed limit.||10% to 25% APR||Professional valuation fees, arrangement fees, annual fees, early repayment fees.||Your credit rating, your loan-to-value and the financial health of your business may affect rates.|
You can read more about business loan interest rates in our guide here.
How do interest rates affect businesses?
Interest rates affect businesses because higher interest rates mean businesses will pay more for borrowing. Shopping around for lower interest rates and choosing the right type of business loan can help your business cash flow and reduce your expenses.
How to lower your interest rate
There is a big variation between the interest rates charged on different types of business loans and by different lenders. The good news is that this means there are many things you can do to lower your interest rate. Here are some suggestions:
- Look for a loan with lower interest rates. For example, government-backed start up loans and simple secured term loans offer lower interest rates than a flexible business line of credit.
- Choose a longer term loan.
- Offer security or a personal guarantee on the loan.
- Work at improving your personal or business credit rating.
How to check your credit rating
You can check your personal and your business’s credit rating using a credit reference agency like Experian or Equifax.
Experian also offers a business assist credit report. This gives detailed analysis on a business’s credit information including financial stability.
How to improve your credit rating
Improving your credit rating is important to help you to raise finance and find lower interest rates on business loans. If you’re a sole trader then lenders will use your personal credit score to decide whether to lend to you and what interest rates to offer. If you own a larger business then lenders will look at the credit score of your business.
Here are some steps you can take if you want to improve your credit rating:
- Get hold of your credit report and look to see what is affecting your credit rating.
- Check for any mistakes that could be affecting your credit rating.
- Consider signing up for a credit report agency. Experian offers a business profile report that shows the top 5 factors influencing your credit score. The report also includes commercial membership credit data (CAIS data) so you will see what other businesses see about your business. You can also get regular alerts of anything that’s affecting your score.
- Work on improving areas that are affecting your credit score. For example, make sure business information is accurate; submit full accounts, only apply for credit when necessary and pay bills and invoices on time.
Frequently asked questions
Other fees and charges add to your total borrowing cost as well as interest payments. Some of those other fees and charges include the following:
- Lenders fees including arrangement fee, annual fee and early repayment charges
- Professional fees incurred as part of the application process
- Admin costs and time of managing the loan
There are many things to consider when you’re looking for business finance. For some businesses it may make sense to apply for a higher interest business loan with more flexibility.
For example, business A is a seasonal business that makes most of its sales around Christmas. It needs a loan to build up stock and pay for staff over the summer. It may make sense to apply for a short-term loan or business line of credit. Although interest rates are expensive, the loan is flexible so there is less risk the business will run out of money. It can also repay the loan in January and so will not owe interest for the whole year.
Lenders may refuse to lend or offer higher interest rates to businesses with a bad credit rating. That’s because there is a bigger risk that you will default on your loan repayments. You may be able to find a more reasonable interest rate if you offer a personal guarantee or assets for security.
The Bank of England base rate affects how much it costs lenders to borrow money. This is why lenders usually adjust their interest rates on flexible loans when the Bank of England base rate changes.
If you have a fixed rate loan then any change in interest rates won’t affect your loan repayments during your fixed period. If you have a flexible loan then your interest rates may change.
Low interest rates usually mean a lower cost of borrowing for businesses. However a low Bank of England base rate can also affect the rate of inflation in the economy as a whole and lead to other increased business costs. This is because lower interest rates can fuel higher inflation in the economy. A high inflation rate leads to higher staff costs and higher purchase prices for stock.