Making Sense of Interest Rates for Business Loans
Everything you need to know about interest rates before you apply for a loan
A business loan can help you achieve your goals and move your company forward, but that cash doesn’t come without a cost. Lenders need to make money, too, and interest is the price you’ll pay for access to the funds you need.
Any time you take out a loan, you’ll repay more than you borrow. The amount depends on several factors, but none are as influential as the interest rate.
The average interest rate for a business loan is about 8%, but depending on the loan type, amount, lender, and your credit history, it can be considerably higher or lower.
The basics of business loan interest rates
Comparing business loan interest rates is one key element in choosing the best loan product. Most borrowers look for the lowest Annual Percentage Rate (APR), the percentage of the loan amount that includes both the interest and the loan fees.
Fixed vs. Variable Rates
While the APR factors into the cost of borrowing, it may not remain the same over the life of the loan, depending on whether the lender offers a fixed or variable rate.
A fixed-rate loan has the same APR for the entire repayment period, regardless of changes to the federal funds rate or other market conditions. The rate remains steady, irrespective of your payment history. Even if you miss payments, the lender cannot increase the rate, although there will be other consequences like fees, credit damage, or lost collateral.
On the other hand, the interest rate of a variable-rate loan can fluctuate over its life. Most business lines of credit, cash advances, credit cards, and some SBA loans have variable interest rates. Budgeting for a variable-rate loan can be more challenging than a fixed-rate one, but it can be more affordable for short-term financing.
What to expect from different types of business loans
While the specific interest rates for different loan products vary, you can expect them to fall within specific ranges for different types of loans.
SBA 7(a) loans
Small Business Administration (SBA) loans are the best option for many businesses because they have lower interest rates and can cover business expenses ranging from working capital to real estate and equipment.
SBA 7(a) are the most common and popular loans; the maximum interest rate depends on how much you borrow. Lenders tie the interest rate to the current prime rate at the start of the month when you close the loan. As of February 2025, that rate is 7.5%.
That’s the starting point for the interest calculation, and the final interest rate depends on your creditworthiness and how much you’re borrowing. However, the SBA caps the maximum rate on variable loans as follows:
- $50,000 or less = Base rate plus 6.5%
- $50,0001 to $250,000 = Base rate plus 6%
- $250,001 to $350,000 = Base rate plus 4.5%
- More than $350,000 = Base rate plus 3%
With the current prime rate of 7.5%, the maximum business loan variable interest rate on an SBA 7(a) loan for less than $50,000 is 14%; borrowing over $350,000 has a maximum interest rate of 10.5%.
Term loans
Loans from traditional banks and online lenders are typically term loans with a fixed interest rate. These loans make budgeting the payments easier since the rate doesn’t change. Still, they usually have more stringent requirements in terms of your personal and business credit, operations, and overall financial picture.
If your business qualifies for one of these loans, there’s a good chance you’ll pay a lower interest rate. The average fixed interest rate for a term business loan is 7.85% (8.79% for a variable rate), but if your credit is less than stellar or your company doesn’t have a solid history, you could pay significantly more. Some alternative business lenders are willing to lend money to entrepreneurs with lower credit scores, but the starting interest rates can be as much as 31% or more.
Business lines of credit
A business line of credit allows you to borrow cash up to a preset limit. Making payments increases the amount of available funds. Interest rates on a line of credit depend on whether they’re fixed or variable and the bank policies. The current (February 2025) average rate falls between 7.58% and 9.35%.
One way to reduce the interest rate on a business line of credit is to use collateral as security. Collateral can include real estate, equipment, cash, or other assets, reassuring the lender that they’ll have the resources to cover what you borrow if you don’t pay.
What determines business loan interest rates?
Although lenders tie business loan interest rates to the prime rate established by the Federal Reserve, the actual amount you’ll pay to borrow money depends on several unique factors.
Your credit profile
The better your credit history, the less you’ll pay to borrow a business loan or a personal credit card. Most lenders consider your personal and business credit scores when reviewing your application and require applicants to have a minimum score to qualify for a loan. Some alternative lenders might offer loans to borrowers with scores as low as 500, but you should expect to pay a significantly higher interest rate.
If your business is new and doesn’t have an extensive credit history yet, the bank will likely rely more heavily on your personal credit score in the decision-making and underwriting process. Paying your bills on time, reducing your debt, and borrowing only as much money as you need can all help raise your credit score.
How long you’ve been in business
Most lenders prefer to work with well-established companies with a track record of financial success. The longer you’ve been in business, the more likely that you’ll qualify for a loan with a competitive interest rate. Although there is no substitute for time, you aren’t necessarily out of luck if you’re a startup or a new company. Some lenders will approve applications at a much higher interest rate or if you can offer collateral.r options before deciding where to apply.
Your business plan and finances
Lenders look at your business to make funding decisions, including evaluating your company’s performance and plans for future growth. You must prove that your company is on solid enough financial footing to repay the loan and has a clear path forward to maintain and improve that position. You must provide evidence of your revenue, cash flow, business plan, and profitability when you apply for a loan.
Your industry
Some industries, such as construction and startups, are considered higher risk than others, such as healthcare and technology. Lenders will perform a risk assessment to determine how vulnerable your business is to market volatility and how it will affect demand and the revenue stream. If the lender perceives your company as a high risk, any loan they approve will have a higher interest rate.
How to get the lowest interest rate on your business loan
The higher the business loan interest rate, the more it will cost your company to borrow money. Therefore, it makes sense to work towards qualifying for the lowest possible rate. Before seeking financing, work to improve your chances of qualifying for the money you need at an affordable rate.
Raise your personal and business credit scores
Higher credit scores tell lenders your company is a lower risk, unlocking the potential for a more competitive interest rate and loan terms.
Personal credit scores are an aggregate of multiple factors, including your payment history, the amount you owe, your available credit, how long you’ve had different accounts, and whether you’ve sought new credit recently. It’s a single number, and you can raise it by:
- Paying off existing debt
- Making on-time or early payments
- Not opening new accounts unless necessary
- Disputing errors and requesting the removal of inaccurate information
Business credit scores are a little less straightforward, and each reporting agency uses a different formula and format to rate your company’s financial status. However, similar principles apply when you want to maintain a competitive business score: Pay your company’s bills on time and avoid taking on too much debt.
Develop a strong business plan
Lenders prefer to work with businesses with clear, well-structured plans that reveal specific goals and strategies for reaching them. Outlining your company’s future in a business plan can impress lenders and improve their likelihood of approving your application.
Provide collateral
Offering valuable assets, such as real estate, helps secure your loan. In return, lenders may lower the interest rate.
Compare lenders
Researching lenders and comparing their loan products ensures you get the most competitive offer and best financing for your needs.
Explore affordable business loan options with Finance Factory
When you work with Finance Factory, finding a loan to grow your business with the lowest interest rates and most attractive terms is easy. We specialize in helping small business owners turn their dreams into reality and solve their financing problems with access to startup and alternative financing options. If you have a credit score of at least 700, fill out our free, no-obligation qualification form to start the process of getting a business loan today.
