Business Loan Interest Rates: Your 2020 Guide

If you plan on taking out a business loan in the future, it’s important to know the typical market interest rates. That way you can tell whether a lender is offering you a fair deal or if you’re being overcharged. This article looks at the average loan rates for different types of business loans heading into 2020, as well as the factors that can help you land better terms.

Average Small-Business Loan Interest Rates

Different types of loans charge different ranges of interest. Here are typical ranges for the most common types of small-business loans, using data pulled directly from lenders in a 2019 report from ValuePenguin, a division of LendingTree.

Type of Loan and Typical APR Range

• Bank loans: 4.00%-13.00%
• SBA(7a) loans: 6.30%-10.00%
• Lines of credit: 8.00%-80.00%
• Online term loans: 7.00%-99.70%
• Invoice factoring: 13.00%-60.00%
• Merchant cash advances: 20.00%-250.00%

Factors That Increase Small-Business Loan Interest Rates

While these ranges can give you an idea what it might cost you to borrow in 2020, your exact business loan interest rate will depend on the lender and the unique factors for your loan application.

Knowing the average small-business loan rates is one thing. But there are also factors that can increase what you’d owe for a small-business loan. Some of these factors you can control and others you cannot:

Rising market interest rates: Lenders base their rates on the short-term federal funds rate from the Federal Reserve. If the Fed tightens its policy, meaning it raises short-term rates, business loan interest rates also go up. The Federal Reserve cut interest rates three times during 2019, according to the Washington Post, and seems to be focused on keeping rates low to prop up the economy. 

If you handle all your personal and business banking with one company, especially one with a local branch where they know you face-to-face, they may be willing to extend you better terms because of your relationship.

A stronger national economy: When the economy is strong, businesses are expanding, so there is more demand to borrow money. As a result, lenders can charge a higher rate. 

Poor credit history: As part of a business loan application, lenders will check your credit score. A weak score shows that you may have a lot of outstanding debt versus your credit limit or that you’ve missed payments on other loans. As a result, lenders could charge you a higher business loan interest rate to make up for the extra risk that you won’t pay them back.

Weak or limited business history: Lenders will also review your business history and income. If your income/profit margins are low, lenders could charge you more because there’s a higher chance of you not repaying. They also could charge more if you’re a relatively new business, since you don’t have the proven financial track record of a more established company.

A lower down payment: When you buy equipment, buildings or other physical assets, you can make a down payment for part of the purchase while using a loan to finance the rest. If your down payment is small or you don’t make one, your business loan interest rate could be higher. The lender is taking more risk because you’re borrowing a larger share of the purchase without putting up as much of your own money.

How to Improve Your Small-Business Loan Interest Rate

Improve your credit score: Adding even a few more points to your credit score can improve your small-business loan interest rate. Some ways to do so include always making your monthly payments on-time for existing debts, paying down the balance on your credit cards and checking your credit report with the rating agencies (Experian, Equifax and TransUnion) to make sure there aren’t any mistakes.

Increase profitability: While this might be easier said than done, if you can boost your profit margins before applying for a loan, that can help your chances of receiving a lower business loan interest rate. Consider applying for a loan, credit card and/or line of credit right after you go through a strong stretch of profitability because this gives you a better chance to lock in a low interest rate.

Create a business plan: If you write a business plan explaining how you’ll use the loan proceeds to grow your company, it shows lenders that you’ll be responsible with their money. This can help your chances during the application.

Put up collateral: Collateral is a valuable asset that backs up a loan, like a building or your personal savings. If you can’t pay off the debt, the lender could claim the collateral for repayment. In exchange for your collateral, they could offer a lower business loan interest rate.

Develop a relationship with a lender: If you handle all your personal and business banking with one company, especially one with a local branch where they know you face-to-face, they may be willing to extend you better terms because of your relationship.

Research your options: There are many lenders competing for your business. If you aren’t happy with the offer for one type of loan/lender, consider applying with a few more before settling at a high interest rate.

Good information gives you an edge throughout the business loan process. By understanding the average market rates and by taking advantage of these strategies, you can land a great deal for your 2020 business loan.

Photo: Getty Images

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