Understanding Business Loan Interest Rates

If you are a business in need of a loan, then it is important to gain a fundamental understanding of what is involved, as well as the factors that may affect both your application and being accepted, and the repayment involved. One particular factor that could influence the success of your small business is the interest rates applied to your business loan. Get an understanding of business loan interest rates and determining factors by reading below.

What are Interest Rates?

Interest rates are a charge that banks or lenders apply to the amount of money you are borrowing. Simply put, the interest rate is an amount added on top of your loan repayments.

  • An example: If your business takes out a loan of $1000, and a bank is charging 5% interest annually, you will then have to pay back the bank the initial loan plus the interest. In this case, you will pay the bank back $1050.

The most common type of business loan is an SBA 7(a) loan. If your business needs general financial assistance for matters such as expanding working capital, renovating a location or refinancing old debt, for example, this is a popular choice. Some of the features of this type of loan include the possibility of securing a loan amount of up to $5 million, and repayment terms of up to 7 years, or up to 25 years. This varies on whether you are applying for a working capital loan, or commercial real estate loan respectively.

Current Interest Rates for Business Loans

Maximum interest rates on business loans statistics determined for October 2018 are as follows:

  • For a loan size of less than $25,000, the interest rate for a standard SBA 7(a) loan is 9.50% (with a repayment term of less than 7 years) or 10.00% (with a repayment term of 7 years or more).
  • For a loan size between $25,000 and $50,000, the interest rate for a standard SBA 7(a) loan is 8.50 % (with a repayment term of less than 7 years) or 9.00% (with a repayment term of 7 years or more).
  • For a loan size of over $50,000, the interest rate for a standard SBA 7(a) loan is 7.50% (with a repayment term of less than 7 years) or 8.00% (with a repayment term of 7 years or more).

How a Loan can Benefit Your Business

Particularly for a small business, a loan can provide a little extra capital that can give your business the kick-start it needs to move in the right direction. An SBA loan will be carefully considered beforehand; not every business is applicable for this type of loan. Being an accredited profitable business is a determining factor, for example. However, if this applies to your business, then a loan may be the logical next step to take your business in the right direction. An SBA loan, or Small Business Administration loan, can vary from $5,000 to $5 million. A loan can also stretch from five to 25 years; this flexibility is one factor that appeals to so many small business owners.

How Does an Interest Rate Affect The Business Loan I Can Qualify For?

Interest rates for business loans tend to vary, and this is dependent on various factors including what type of loan you apply for, as well as being dependent on different lenders and borrowers. Add to this the economic environment, and it is easy to see why business loan interest rates can differ from one case to another. As stated by Majd Maksad, “Having an excellent credit score does not guarantee a low interest rate.” Majd Maksad is the Founder and CEO of Status Money, a company that allows individuals to compare their finances anonymously.

Economic influences, in particular, can either see a boost in your business with a low interest rate or can potentially hold you back, it’s entirely dependent on the market. As a small business owner, you can take advantage of certain interest loan rates where necessary, but this will involve an understanding of what can affect business loan interest rates.

Factors that affect business loan interest rates

The factors that have a significant effect on interest rates business loans can most generally be categorized into the factors relating to the business itself, as well as those related to you, the business owner, the lender and the loan.

In particular, the maximum interest rate applied to an SBA 7(a) loan is determined by the following three factors:

  • A base rate – the base rate is the minimum rate of interest a bank will charge your business. This is usually a set amount, with the bank unable to provide loans at a rate lower than this percentage. As of October 2018, the current base rate is 5.25%, with the remaining interest rate determined by the percentage markup.
  • The term of the loan – this applies to the length of time you have to pay back the loan.
  • The size of the loan – this refers to the amount of money you borrow.

The Type of Business You Own

The type of business you own will be a particularly determining factor. As is the nature with smaller businesses and start-ups, some may be more secure than others, and those businesses that are therefore considered riskier may need to pay higher interest rates for business loans. To apply for a Small Business Loan, or SBA loan, there are several basic requirements including:

  • Being in business for at least two years
  • Have a personal credit score of over 650
  • Have a profitable business
  • Make $100,000 or more in annual revenue

These considerations are usually to ensure that your business will be able to repay the loan.

What can be seen as a benefit of an SBA loan are the reasonable interest rates. You can find out more online by searching ‘interest rate for business loan,’ but in general, they typically start from 6.5 percent, that can be paid over a varying amount of time.

The Effects of Interest Rates on Your Business

It is best to keep an eye on interest rates, as the general trend applies that when rates rise, banks will charge more for your business loan. Any earnings or profit that you then make can be compromised due to paying interest. Over time, this could have a significant effect on your profit margins, and, as many small business owners know, timing is everything. An opportunity to expand your company or start a new project could be marred by high-interest rates on a loan you have taken out, due to your cash flow situation. Of course, interest rates will also go through low periods, at which point your business can maximize and benefit from this. At this time, a low-interest business loan can allow for company expansion and growth.

Timothy Kelly

Timothy Kelly

Tim has been a writer for over 20 years covering financial markets and small business. In addition to writing about the financial markets, Mr. Kelly writes extensively about digital marketing and SEO. Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art. Mr. Kelly has been a decades-long community volunteer in his hometown of Long Island where he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York. Before creating ForexTV, Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets, where he created Bloomberg Personal Magazine. Contact Tim tim.kelly@smallbizstar.com