What is a business loan and a business loan rate?
A business loan is a loan taken out strictly for business purposes. This loan covers any financing for various aspects of a business, including the initial creation of the business and the funding needed to keep the business running. Most business loans are provided by credit unions, banks or online lenders.
Some business loans require companies to be at least six months old and make at least $50,000 in revenue per year to be eligible. However, some lenders will provide money to entrepreneurs looking for funds to get their business up and running and base eligibility on the individual’s credit history and other factors.
All business loans come with a loan interest rate. A loan interest rate is the amount a lender charges the borrower to use the money and is expressed as a percentage of the total amount of the loan. Most loans charge interest on an annual basis. Annual interest rates are known as annual percentage rates (APR). The interest is money charged in addition to the loan payback, making the total amount a business owner pays back for the loan more than the loan itself.
Related: What a Lien? A Definition for Your Small Business
Different types of loans and average business loan rates for each
The following are the different types of loans and their loan rates that a small business owner may be eligible for:
- Term loans: This is the most common type of business loan taken out and involves a specific amount of money taken out as well as a specified repayment schedule with either a floating or fixed interest rate. Average interest rates for term loans are between 4% and 13% but can vary greatly.
- SBA 7(a) loans: This is the primary Small Business Administration (SBA) loan and allows small business owners to apply for as much as $5 million in funding from various institutions. SBA 7(a) loans typically have a low APR and a long-term repayment plan, making them highly attractive to small businesses. However, the qualification process for the loan can take up to three months. The average loan rate for this type of loan is between 6% and 10%.
- Lines of credit: Businesses are also able to open up lines of credit with a limit that ranges from $10,000 to $1 million. Interest rates for business lines of credit range from 8% to 80% but only applies to the funds the business uses.
- Merchant cash advances: This type of loan offers lump sums of credit that are received quickly. However, merchant cash advances have very high interest rates that range from 20% to 250%.
- Equipment financing: This type of loan helps businesses purchase equipment for their organization. The equipment acts as collateral for the loan, making this option flexible. Average loan rates range from 4% to 40%.
Related: What is the SBA? How the Small Businesses Administration Can Help
Factors that can affect a business loan rate
There are several factors that affect a business loan rate, including:
- The lender you borrow from (banks typically have the lowest interest rates)
- How long your company has been in business
- Your business’ annual revenue
- Your personal and business credit score
- Current and projected business finances
- Your relationship with the lender
Frequently asked questions about business loan rates
What is the average interest rate on a business loan?
The average small business loan interest rate is between 4% and 6%. However, interest rates vary greatly across lenders.
What is a typical small business loan amount?
A typical small business loan ranges from $10,000 to $500,000. According to Fundera, the average loan across all banks in the nation is $633,000, the average SBA loan is $107,000 and the average short-term loan is $20,000.
What are the typical business loan terms?
The terms of each type of loan vary depending on a business’ needs and capacity. SBA loan terms are typically between five and 25 years, and short-term loans range from three to 18 months. Business lines of credit often have terms that range from six months to five years.