Running a small business in today’s economy requires a great deal of dedication, persistence and hard work. Sometimes, you might need additional funding to meet your goals and see your vision through. Read our funding guide to learn about small business financing options and the latest loan rates.
What Is a Good Small Business Loan Interest Rate?
The interest rate of a business loan typically varies due to factors such as the type of funding, loan amount, lender and borrower’s credit history. In general, bank business loans have some of the lowest interest rates available. However, bank loan application requirements are typically much more stringent than other types of business funding. They may require a certain number of years in business, good business and personal credit scores, minimum annual revenue, extensive paperwork, and collateral, depending on the specific situation. Due to the rigorous loan and application requirements, not all small businesses qualify for this type of capital.
Loans backed by the U.S. Small Business Administration (SBA) also feature low interest rates for small businesses since they’re federally guaranteed. This allows SBA-approved lenders to fund small businesses that may not otherwise qualify for a loan.
Certain SBA loans, specifically, the emergency Paycheck Protection Program (PPP) loans dispensed as part of the COVID-19 stimulus packages, are forgivable for businesses that satisfy a number of requirements. For more information on PPP loans, read our blog about the most recent updates to the program.
Most other non-federal and/or non-SBA business loan interest rates depend on a variety of specific factors, such as the type and terms of the loan, the business’s financial history and the lender.
How Much Money Do I Need to Fund My Small Business?
The amount of working capital a small business needs to cover day-to-day operations depends on a variety of factors, like equipment, inventory and payroll costs, monthly revenue and other expenses. Startups typically have many one-time, up-front costs based on details like the specific industry, type of business, local and/or federal regulations. While actual amounts vary widely, recent reports suggest that microbusiness startup costs are around $3,000, while home-based small businesses can range from roughly $2,000 to $5,000.1 Keep in mind that the maximum business loan amount that startups and other small businesses may qualify for varies based on details like the credit type, the borrower’s personal credit history and the lender.
Average Interest Rates of Common Business Financing Types
Interest rates will vary by the type of business loan, the borrower qualifications and the lender. Below is a list of some of the most common business financing options and their relative interest rate ranges for qualified borrowers:
Bank Loan Rates
Bank business loans generally feature some of the lowest interest rates available for small businesses. However, bank loans typically have stricter requirements, like minimum annual revenue, specific number of years in operation and good personal and business credit scores. This financing option also requires a good deal of paperwork, and the process takes longer than most online lenders. While bank business loan interest rates depend on a variety of factors, such as the specific creditor, loan terms, borrower’s payment history and principal amount, the interest rates can range from around 2 – 13%.2
SBA Loan Rates
Due to the federal guarantee, SBA-approved lenders can extend low-interest rates to small businesses that might not otherwise qualify for a loan. The maximum interest rates for SBA loans are set at the federal level. With the prime interest rate currently set at 3.25%, 7(a) loans, 7(a) small loans and CAPLines from any SBA lender carry the following maximum interest rates:
Variable loans less than 7 years:
$25,000 or less: Prime Interest Rate + 4.25%
$25,001 — $50,000: Prime + 3.25%
Over $50,000: Prime + 2.25%
Variable loans longer than 7 years:
$25,000 or less: Prime + 4.75%
$25,001 — $50,000: Prime + 3.75%
Over $50,000: Prime + 2.75%
Read this chart for more information on the current SBA maximum interest rates by loan product.
PPP loans are a special type of SBA loan that are fully forgivable for those that satisfy specific requirements. However, normal SBA loans are not eligible for full loan forgiveness. PPP loans that are not forgiven carry a 1% interest rate.3
Term Loan Rates
Term loans, which for business use are often referred to as “small business loans,” are accessible from online lenders, banks and other funding sources for a wide variety of principal amounts. The loan repayment terms, fees and other costs for this type of capital can vary by lender. Most term loans are repaid in a matter of months or years, though it can depend on the amount borrowed. While rates depend on many factors, like the creditor, borrower’s personal and business credit scores and the repayment terms, interest rates for online term loans can range from around 7 – 100% or more, depending on the specific situation.2
Business Lines of Credit Rates
Business lines of credit are a form of revolving capital that provide reusable access to funds up to the account credit limit. As money is repaid, that amount is available to borrow again in the future. Business lines of credit are similar to business credit cards, though creditors typically do not offer as high a credit limit with credit cards when compared to other funding methods.
Business lines of credit are available from sources like banks, credit unions and online lenders. Interest rates for this type of funding depends on factors such as the lender, borrower’s payment history and credit limit. Small business borrowers can expect to pay roughly 3 – 80% interest rate for business lines of credit, depending on the specific agreement.4
Business Credit Card Rates
Business credit cards are another form of revolving credit that provides access up to a maximum credit limit. They’re available from many sources, like credit card companies, banks and credit unions. However, some lenders require customers to have an established business credit history, in addition to other application conditions for this form of financing. Interest rates for this form of financing depend on many factors, but the current average business credit card interest rate is roughly 17%.5
Other Fees and Costs Associated With Small Business Loans
While the interest rate is a significant factor when reviewing different funding options, it’s likely not the only fee associated with a small business loan. Other fees may also apply to the usage, account and/or application process of a business loan. Make sure to assess any additional costs when considering small business funding options:
Guarantee fee: This is a fee associated with specific SBA loans to help recover lost funds from late and delinquent borrowers.
Application fee: Some creditors require an application fee for any prospective borrower, regardless of loan application approval.
Origination fee: Occasionally, an origination fee is applied when a borrower opens a business account, which may include the application fee.
Prepayment penalty: Some creditors may charge a prepayment penalty if a borrower pays off the loan prior to the end of the full term. Look for lenders with no prepayment penalty fees in order to avoid paying more for your small business loan.
How to Improve Your Chances of Getting a Small Business Loan
Different types of small business loans will have varying application and borrower requirements. In order to qualify for the best type of loan for your needs, it’s helpful to know what areas are most important to business creditors.
Factors That Can Impact a Business’s Ability to Secure a Loan
While specific business loan requirements will vary, generally, most creditors consider a prospective borrower’s Five Cs of Credit when reviewing credit requests. If your company does not qualify for a small business loan, improving your business’s finances in the following areas can also help increase your chances of securing a loan in the future:
- Character: This refers to a business’s creditworthiness, or the likelihood of repayment based on payment history. Improving your personal and business credit scores can also help benefit this portion of a loan application.
- Capacity: Sometimes referred to as cash flow, this area measures a borrower’s ability to repay a loan based on the available funds in their business. Maintaining a positive cash flow is a good sign that you’ll be able to keep up with loan repayments and be a good client for lenders. Another way to help improve your business’s financial capacity is to request a smaller loan principal.
- Capital: This area measures a small business owner’s investment in their own company. A stronger self-investment can help show lenders that you’re willing to do the hard work required in running a business.
- Condition: Condition refers to how a business plans to use funds, in addition to its general financial health. Do you plan to expand and grow, or is a small business loan simply going to help your company survive for another week? Lenders generally want to know that your company has a good chance of staying in business for the foreseeable future.
- Collateral: In case a borrower is unable to repay a business loan, some type of financial collateral can help lenders recoup any lost funds. Due to a decreased financial risk on behalf of creditors, more upfront collateral may help improve the chances of securing a small business loan at a better rate.
How to Find the Right Small Business Loan for Your Needs
While low-interest rates are an obvious perk of some business funding methods, these types of loans are generally the hardest for borrowers to qualify for, and they also typically take more time for creditors to process than other methods. Before you apply for any type of business loan, carefully review all application qualifications as well as the product’s rates and terms, which should be available on a lender’s website.
1Caramela, S. (2020). Startup Costs: How Much Cash Will You Need?
2Luthi, B. (2020). The Average Business Loan Interest Rate in 2020.
3U.S. Small Business Administration. (n.d.). First Draw PPP Loans.
4Song, J. (2021). Average Small Business Loan Interest Rates in 2021: Comparing Top Lenders.
5McCann, A. (2021). What Is the Average Credit Card Interest Rate?
The information in this article is provided for educational and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial, legal or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.