Average Business Loan Interest Rates in 2023

Current business loan rates vary between types of business loans and lenders. Your individual business details, such as credit score, annual revenue and time in business, will also affect the interest rate you receive.

Because of various factors affecting interest rates, it’s important to review all aspects of a small business loan before making a decision.

SBA 7(a) loans

The U.S. Small Business Administration (SBA) partners with financial institutions to provide SBA loans to business owners who may not qualify for traditional financing. The SBA guarantees a portion of these loans, reducing risk for lenders and making it easier to approve certain borrowers. The 7(a) loan is the SBA’s primary lending program for small business owners.

Borrowers can use SBA 7(a) loans for various expenses, such as working capital, real estate, equipment and more.

The SBA limits the interest rate lenders may charge based on the current prime rate (8.5% as of July 31, 2023). The SBA then caps the amount lenders can add to the prime rate, depending on the type of loan, loan amount and repayment term.

Because of this cap, SBA loan rates are often competitive compared to other types of business loans.

SBA 7(a) variable loan interest rates

*Variable interest rate 7(a) loans are pegged to the prime rate (currently at 8.5%), the LIBOR rate or the SBA optional peg rate.

According to the SBA, fixed interest rate 7(a) loans are based on the prime rate in effect on the first business day of the month of your loan.

SBA 7(a) fixed loan interest rates

Rates accurate as of August 17, 2023.

Traditional bank loans

Banks tend to have strict eligibility requirements, typically requiring good business and personal credit, two years in business, a business plan, financial statements, cash flow projections and collateral. Because of these high underwriting standards, traditional bank loans tend to have the lowest interest rate ranges and most attractive terms.

Business lines of credit

A business line of credit is a form of revolving funding that businesses can use repeatedly. Like a credit card, the lender allows you to borrow up to the limit, repay what you borrowed and borrow again. One of the advantages of a business line of credit is that you only pay interest on the outstanding amount.

Interest rates on business lines of credit vary depending on whether they come from an online lender or traditional bank and if they’re secured or unsecured.

Online loans

Online loans come from lenders without brick-and-mortar locations. These alternative loans are often available to borrowers with less-than-perfect credit, making them generally more accessible than traditional term loans.

However, these flexible qualifications often mean you’ll receive higher interest rates and less flexible terms with an online lender than with a traditional bank.

Merchant cash advances

A merchant cash advance allows a business to borrow a lump sum against its future credit and debit card sales. Rather than repaying the advance in monthly installments, the lender partners with the business’s credit card processor and withdraws a predetermined percentage of the business’s sales each day or week until the loan is paid in full.

Merchant cash advances charge a factor rate rather than an interest rate. The lender multiplies the advance amount by the factor rate to determine how much interest is due.

For example, if you borrow $10,000 and the factor rate is 1.3, you’ll owe $13,000, including principal and interest. Factor rates tend to be higher than interest rate ranges on traditional bank loans.

Invoice factoring

Invoice factoring is a type of financing where businesses can sell their accounts receivable (invoices) to a lender to get cash immediately. The factoring company collects the invoice from the customer, takes their fee out of the payment and sends you the remaining balance. You can usually get 70% to 90% of the value of your unpaid invoices advanced to you from the factoring company.

Factoring companies charge a factoring fee — either as a flat fee per invoice or as a variable fee that increases if the invoice remains outstanding beyond 30 days. Invoice factoring tends to be more expensive than other forms of financing.

In addition to interest and factor rates, many lenders charge loan fees to cover the costs of issuing and administering a loan.

Here are some common fees you may see included with your small business loan:

• Origination fee: The loan origination fee covers the costs of processing the loan, including underwriting, preparing and reviewing the loan application and deciding whether to approve the loan. The loan origination fee may be a flat fee or a percentage of the loan amount (the latter usually ranges from 1% to 8.49%).
• SBA guarantee fee: The Small Business Administration charges this fee to guarantee a loan. It usually costs between 0.25% and 3.75% of the guaranteed portion of the loan.
• Servicing fee: Some lenders charge servicing fees annually to cover the costs of administering your loan, such as customer service, billing and collections. The annual service fees for SBA 7(a) loans range from 0.25% to 0.75% of the guaranteed portion of the outstanding balance.
• Underwriting fee: A lender can charge an underwriting fee for assessing and underwriting a business loan application. The amount varies from lender to lender but may be a flat fee or a percentage of the loan amount.
• Late payment fee: Lenders may charge a late payment fee if you pay past the due date. The fee may be a flat fee or up to 5% of the outstanding amount.

Some fees, such as origination and underwriting, are included in the loan’s APR. Other fees may not be included in the APR. Check with your lender to see which fees they’ve designated as APR fees so you can calculate the total cost of borrowing.

One of the best ways to secure the lowest business loan interest rate is to make your business look strong and resilient to lenders. Consider the following tips to improve the likelihood of securing an attractive rate.

1. Offer collateral

Some types of funding may require collateral, such as equipment financing or invoice factoring. Offering collateral when not required could help you receive more favorable rates.

When you provide collateral, you allow the lender to seize the assets you offered if you default on the loan. This reduces risk for the lender and may reduce the interest the lender charges. Secured business loans using collateral generally come with lower rates than unsecured business loans.

2. Improve your personal credit

The higher your credit score, the less risky you may seem to a business lender, which could result in low-interest financing. Depending on your credit score, you may want to improve your credit profile before applying for financing. Some quick ways to build up your credit include:

• Paying down any existing debt, including credit card balances
• Making on-time or early bill payments
• Disputing any errors that currently appear on your credit report (you may be able to remove those errors as well)

3. Build your business credit score

In addition to solid personal credit, it’s essential to keep track of your business credit report. While personal credit scores have a fairly standardized rating system, business credit scores vary depending on the company calculating the score. For example, Equifax creates three numbers for small businesses: a business credit risk score, a business failure score and a payment index.

4. Establish a relationship with a lender

Lenders may give lower rates to borrowers they’ve worked with in the past. Both banks and alternative lenders may be more willing to approve your business loan application if you’ve opened a deposit account with the institution. And if you’ve previously borrowed from the lender and made on-time payments, you could have a good shot at getting a second loan.

Furthermore, some banks offer reward programs for members, such as discounts if you decide to take out a business loan or line of credit.

Although circumstances could prevent you from borrowing and banking in the same place, it’s worth trying to do so if possible.