Understanding Business Loan Rates

business loan interest rates

If you need money to grow or expand your company, you will most likely start researching the various small business loan options that are available. Large banks, small community banks, credit unions, and direct lenders offer loans. The application process, approval requirements, and processing times vary depending on the type of lender you work with.

In addition, banks, credit unions and direct lenders charge interest on top of the loan amount, and their interest rates differ based on several factors. If you are wondering how business loan interest rates are determined, this Balboa Capital blog post is for you. It features all of the important information that you need to know.

The business loan process.

The business loan process involves the granting of funding from a lender to a business owner, referred to as the debtor. The debtor will repay the loan back, with interest charged as a percentage of the loan’s principal, over a specific time period. Both the lender and debtor will benefit from this agreement.

The lender makes money in the form of interest payments and any loan-related fees, and the debtor is able to secure growth capital to fund expansion efforts, marketing, equipment, and a number of daily business expenses.

Why loan interest rates differ.

Before you apply for a business loan, it is important that you compare the various options so you can pick the one that best suits your company’s needs. That is because each type of loan has different rates. For example, if you need cash right away and do not mind repaying a loan with a higher interest rate, consider a short-term unsecured loan. This type of loan has higher interest rates because it does not require collateral in most cases.

Secured business loans, on the other hand, have lower interest rates because the lender has collateral to fall back on if you stop making loan payments. SBA loans and conventional bank loans normally have the lowest interest rates, but they can be difficult to obtain. Reason being, they have flexible lending standards. Alternative loans from online lenders and direct lenders typically have higher interest rates due to their easier qualification requirements. That said, the online business lending industry is very competitive, and this has resulted in highly competitive interest rates.

Things that influence interest rates.

There is no “one-size-fits-all” interest rate for business loans. That is because each business owner’s financial situation and credit rating is unique. The interest rate you get will be based on several factors, including your creditworthiness, time in business, and annual revenue. Obviously, you will get a more favorable interest rate if you have a good credit score, and your business has generated solid revenues over the past year or longer.

If you are starting a new business, you might find it difficult to get approved for a loan because startup loans are deemed risky by lenders. Moreover, the interest rates for a new business are going to be higher than for an established company that has been operating for one or more years.

How to get a low business loan rate.

If you have been prequalified for a business loan and think the interest rate is too high, you are not alone. Many business owners are in the same predicament because of their company’s credit history and their personal credit score. As you probably know, poor credit is often a red flag for lenders. The good news? There are ways to improve your credit so you can obtain a business loan that does not have a sky-high interest rate.

For starters, check your personal and business credit reports to see if there are any errors or inconsistencies and, if you find any, report them so they can be resolved. Next, make sure you do not have any late payments, outstanding bills, or unnecessary debt. If you do, ask your accountant for recommendations on how to get your finances in order. Most business owners are surprised to find out that simple steps like these can put them in the driver’s seat when it comes time to apply for a loan.


We hope this information helps you better understand business loan rates. Finally, most lenders have fees that can increase the cost of your loan, so keep this in mind when you are comparing lenders. It is common for lenders to have application fees, loan origination fees, and/or service fees. If you plan to have enough cash flow to pay off your loan early, make sure your loan agreement does not have prepayment penalties. If you have any questions about business loans, feel free to contact Balboa Capital today. We are here to help.