This is a great question, but it has no exact answer. Although our rates start at 4.8 percent, there is no average rate because business funding can vary based on industry, annual revenue, geography, cash flow, credit, business credit, security interest, security interest, and more. We’ve previously discussed what a business line of credit is and how to qualify, but in this article, we’ll discuss their interest rates and the factors that play in to those rates.
What is the difference between secured and unsecured funding and why are the rates different?
Secured Line of Credit
Secured funding will always have a lower interest rate than unsecured funding; however, there are more options with unsecured funding when seeking a business line of credit. An asset must back secured funding. This could be anything from equipment to receivables. The issue for many businesses is that they do not have the types of assets on hand for which many lenders are looking. The other issue is that once the business line of credit is issued, the assets become encumbered.
Unsecured Line of Credit
An unsecured business line of credit is more common since all businesses have the potential to qualify; however, since the line of credit is not backed with collateral, there is more risk involved on the lender’s end. As a result of this increased risk, the rates will usually be higher than a collateralized line. Although unsecured lines are riskier, they still can have a low cost depending on other factors.
So, what is the average interest rate for a business line of credit? Now that we have established the difference between a secured and an unsecured line of credit, we are closer to understanding the answer.
Does industry play a factor in the average interest rate for a business line of credit?
The next factor to consider is the industry in which the business operates. The average interest rate for business lines of credit may also vary from industry to industry. The reality is that some sectors perform better than others. Some industries fluctuate more with economic and political decisions (energy, for example). Some industries are better served with a different financial vehicle than a line of credit. Due to this variation, interest rates will be different across industries.
Does business or personal credit determine the average interest rate for a business line of credit?
The third factor is creditworthiness. Many businesses qualify for a line of credit. However, these lines of credit may look different from business to business. There are many different lines of credit for the different qualifying factors. A business with more time in business might get a better rate than an identical younger business. The creditworthiness and history of the business owners is a factor. The credit of the business plays probably the largest role. Just like with consumer financing, a business line of credit will depend on the credit and risk factors. A business that scores as a lower risk will be offered more favorable terms.
If my company has a strong gross profit margin, will that make a difference in determining the interest rate on a business line of credit?
Financial strength is the final piece of the puzzle that plays a major role in the average interest rate on a business line of credit. Outside of the credit of the business, the other equally major determining factor is affordability. A business must be able to afford the repayment of the line of credit. Better cash flow for a business usually means the lender will offer a lower interest rate. Also, most small business lenders will evaluate both personal and business credit when a business owner applies for a line of credit. As we’ve discussed several times before, lenders like to see that you can repay your previous business and personal debt obligations on time.
So, what is the average interest rate for a business line of credit?
We wish there were a more straightforward answer. We all would like to be able to provide the same response to every potential client. There are, however, reports of APR rates for business lines of credit ranging from 7 to 36 percent. That said, all businesses are different, and because of this, interest rates will differ on a case-by-case basis. The best thing to do is to allocate some time to have a discussion with a business finance professional. Then you will be provided with a more exact answer.
Crestmont Capital offers flexible options for business lines of credit! Learn more about them here. If you’re interested or have any questions, please don’t hesitate to contact us.