If you are looking for and comparing different business loans, interest rates are one of the most important factors to consider. It is difficult to know which interest rate is favorable if you do not have other references to compare.
The average interest rate on business loans is no longer what it was ten years ago when banks were less strict and approved most applications. Today’s traditional lenders have stricter requirements, and businesses often seek financing from other sources.
It is vital to know the interest rates you can expect when applying for a business loan
Here, in this article, we inform you of the average interest rates on business loans, depending on the type of loan and type of lender. At Fincue, our goal is to help you get the best deal when taking loans, be it a business loan or otherwise. We do this by connecting you with the right brokers here in Australia.
Business loan interest rates by type of loan
The first way to break down business loan interest rates is by organizing them by loan type.
These are the annual equivalent rates, Annual Percentage Rate, (APR), based on the types of business financing available:
- Traditional bank loans: 4% to 13% APR
- Small business loans: 7.5% to 10%
- Medium-term loans: 7% to 30% APR
- Equipment financing: 8% to 30% APR
- Credit lines: 7% to 36% APR.
- Factoring: 13% to 60% APR
- Short-term loans: 8.5% to 80% APR
- Merchant Cash Advances: 40% to 150% APR
You wonder why there is such a difference in the range of interest rates. This is the reason:
The lenders with the lowest rates often require a strong credit score, collateral, and that your business has been in business for several years. While small business loans have the most favorable interest rates, these loans are also the hardest to get. The application process can take several weeks, and applicants must submit extensive documentation to prove they are creditworthy.
Bank loans have a rigorous qualification process, similar to small business loans, but the advantage is that they offer longer financing terms compared to business lines of credit, online loans, or cash advances.
The higher range of interest rates offers some benefits, such as much faster financing and access to cards, advantages that traditional loans do not normally offer. In addition, the requirements for applying for short and medium-term loans are less strict: even companies with bad credit can receive financing.
Business loan interest rates by type of lender
Interest rates on business loans also vary by type of lender. Here are the average interest rates according to different types of banks and lenders:
- Large national banks: 2.55% -10.00%
- Small national and regional banks: 2.48% -13.00%
- Online and Alternative Lenders: 13.00% -71.00%
When you compare the rates of the major national banks with those of the online lenders, you will see a big difference. Higher interest rates are associated with a shorter loan repayment period. Also, online business loans are much easier to get. The requirements – such as how long the business has been in business, annual revenue, and credit score – are much less stringent.
Ultimately, before making a final decision, it is important that you understand the interest rates of each lender or each type of loan, and that you evaluate whether the interest rates they offer you are fair. You can determine if your interest rate is fair when it allows you to generate a positive return on your investment.
How is the interest rate on a business loan determined?
The average rates that we have provided are only illustrative since the final rate you receive will be determined by your lender, who will take into account different factors. Your credit score isn’t the only factor you’ll consider, as many lenders look at your entire business profile.
Here are the factors that lenders consider when evaluating your business loan application:
- Your personal credit score.
- Your business credit score.
- The value of any collateral you can provide.
- The outstanding balance on other loans you have, or any debt you are currently paying.
- The total amount of the loan that you have requested.
- The purpose you have for the loan.
- Your financial statements.
- The duration of the loan.
- The cash flows of your business
As you can see, lenders examine a variety of factors and requirements when determining your interest rate.
By looking at all of these factors simultaneously, you may, for example, have a strong credit score, but still don’t qualify for a traditional loan because your business has been in business for less than 2 years. This is where online and alternative loans can be a viable option.
And always remember: if you are not satisfied with the interest rate they offer you, there are always ways to reduce it.
Use this tool to calculate your payments
Interest rates can be scary. But when you take a business loan, interest rates are just one part of the whole picture to consider. The amount of money you are borrowing, the time it will take to pay it back, and any other associated fees, such as origination and processing fees, or the prepayment penalty, also come into play.
Combining all this data, you will get a monthly payment amount. That is the key figure that will help you decide if you can afford the loan. But how does one calculate that monthly payment? Make it as easy as possible, using a business loan calculator.
When you know how much your monthly payment will be, make sure it doesn’t exceed 80% of your net income. It is always advisable to leave room for unexpected expenses or fluctuations in your income.
It is also essential that the return you expect to obtain from your investment exceeds the total cost of your loan, including the interest rate and other fees. In other words, before making a final decision, you must calculate the profit that you will obtain thanks to the loan and compare that figure with the total cost of the loan.
If all the numbers make sense, all that is left for you to do is apply for a business loan. Consider Fincue as your best option when you need a facilitator to get you the right broker that will get a get you the lender, with a suitable interest rate. There are lenders who can offer business loans of up to $500,000 to grow your business, with interest rates that range between 1% and 2.5% per month and terms that vary from 24 to 60 months. Speak with us today at Fincue.