The cost of your small business loan depends on various factors which include the type of loan and what you need to use the funds for. In 2020, the average business loan interest rate is as low as 2% as high as 100% or more. When doing your research for a small business loan, you will come across online banks, credit unions, micro lenders and much more. You will also come across different rates based on the loan you get therefore you need to compare several loan options before you apply so you can get the best deal.
Costs for Small Business Loans
Small business loan costs depend on the APR (annual percentage rate) which includes the interest rate plus any other fees that are required for the loan. It is important to know that there are two different kinds of interest rates, fixed and variable.
Fixed interest rates do not change throughout the term of the loan and neither will your payments. Variable interest rates can vary and can fluctuate as the market interest changes. Consider these factors when weighing the costs of your small business loan. Other fees to consider are late payment fees, documentation fees, and prepayment penalties.
Interest Rate Costs and Terms by Lender
Although interest rates vary depending on your creditworthiness, loan amount, and use of funds, there are some averages you can take a look at to help guide you in the range that you may get.
Domestic Banks: the average annual interest rate is 3.51% with a loan size of up to $400,000.
Large Domestic Banks: these include banks like Chase and Bank of America in which the average interest rate is 3.43% with a loan size of up to $590,000.
Small Domestic Banks: average loan rates range from 3.5%-4.91% with a loan size of about $145,000.
SBA Loans: the average is 6% for SBA loans and 5.96% for small domestic banks with a loan size average of $107,000.
How to Get the Best Interest Rate?
The lower your interest rate, the lower the payments you will need to make. In order to do this there are a few things you can do to reduce the risk.
- Improve your personal and business credit: lenders will look at both your personal and business credit so be sure to make sure they are strong. To improve your credit, you can make timely payments, pay down high balances, and avoid debt.
- Late fees: some fees to look out for are origination fees, application fees, service fees, processing fees, closing fees, and prepayment penalties. Compare what lenders charge and see if you can lower the amount as these can increase the overall cost of the loan in a big way.
- Time in business: depending on how old your business is, the lender may see your business as more or less risky. A business that is under two years is risky therefore they will charge a higher business loan rate.
- Collateral: by adding collateral, you can lower your interest even more. The only downside is that you risk losing your asset if you default on the loan.
- Avoid high-interest options: some business loans have higher interest rates regardless of your credit history. The loans that have high interest include, short-term loans, merchant cash advances and invoice factoring.
The Bottom Line
The best way to know if you are getting the best rate for your small is business is by shopping around. If your credit history is not great, you can work to improve it in the meantime if you want to get the best rate possible. Many factors depend on the interest rate so by comparing them with multiple lenders you will know you are getting the best deal for your business.