Average Small Business Loan Rates in 2023

What Is a Loan Interest Rate?

A loan interest rate is a percentage of the principal amount borrowed. There are several ways of calculating interest rates on a business loan. Knowing how interest rates are calculated can save you money when choosing a small business loan. As a borrower, you’ll want to understand lenders and all the fees associated with their loans plus know how they’re calculating interest rates.

Average Business Loan Interest Rates by Type

The loan you apply for will depend on the interest rates offered. Not all loans are created equal, and all loans have their pros and cons. If you’re looking for the best loan for your small business, you’ll want to start with knowing the average business loan interest rates for the various types of loans available.

SBA Loans

The Small Business Administration (SBA) offers several types of small business loans. Generally speaking, these loans have some of the best rates and are easier to qualify for than traditional bank loans. This is because SBA loans are guaranteed by the US government’s Small Business Administration, making them much less risky for lenders.

• SBA 7(a) loans: 7.50%
• SBA community development corporation (CDC)/504 loans: 2.14%
• SBA microloans: 8.00%
• SBA disaster loans: 3.75%
• SBA veterans advantage loan: 7.25%

Learn more about SBA loans.

Traditional Bank Loans

Traditional bank loans are what we think of when we think of small business loans. These loans used to be the go-to small business loan, but times are changing. These loans still have their place and carry many benefits; for example, traditional bank loans tend to have lower interest rates than online loans.

The average interest rate for a traditional bank loan is a range between 2.00% and 13.00%

Online Business Loans

Online business loans are easier to qualify for than traditional bank loans and SBA loans; however, this comes at a cost — interest rates are more expensive. Borrowers like the convenience of doing business with online lenders.

These lender’s rates are the only things that cause concern — call it “sticker shock,” but the interest rates that some online lenders charge is arguably leaning on the verge of predatory lending. Don’t be afraid to look, but before you buy, make sure you know what your rate is and what it will cost you to borrow the credit.

The average interest rate for an online loan is a range between 2.00% and 100.00%

Invoice Financing

Invoice financing is where you borrow money from your outstanding accounts receivables (ARs). Businesses pursue this type of financing when they need immediate cash flow.

Example:
A vendor does business with other businesses extending net-30, net-60, or net-90 terms. This means the company they’re doing business with is buying a product that they’ll pay for at a later date, usually 30 days later. A problem occurs when the company they bought the product from on credit needs money to operate now. To solve this problem, the vendor finds a factoring company, which is someone who buys outstanding AR loans at a discount, providing the business with a cash advance.

The average interest rate for an invoice factoring loan is a range between 1.15% and 4.50% per 30 days.

Merchant Cash Advance

Another lending option is merchant cash advances. Simply defined, these are advances of capital that are repaid on future credit card sales. These payments are made to the merchants as a percentage of sales.

Example:
A restaurant needs a new fryer to replace a broken one. The fryer costs $1,000, so they apply for a merchant cash advance through a merchant cash advance lender. The lender agrees to advance the restaurant (borrower) $1,000 at 40% interest per year. The restaurant agrees, and a percentage of all future credit card transactions are deposited directly into the lender’s business bank account until the money is repaid. Paying back the loan early won’t save you on interest; however, the longer it takes you, the more interest you’ll pay.

The average interest rate for a merchant cash advance loan is a range between 13.00% and 350.00%.

How to Get a Low-Interest Business Loan

Build Personal and Business Credit

Curious to know how to get a low-interest business loan? Building good personal and business credit is the best way to qualify for a low-interest business loan. That being stated, it is a process to build personal and business credit and an even more complex process to rebuild credit that has already been tarnished.

Be in Business for at Least Two Years

The longer you are in business, the more likely you are to receive a better interest rate on your business loan. Most business loan rates start to go down considerably when a business surpasses the two-year mark. Factor this in when applying for a business loan or some other type of business credit.

Learning how business loans work can save you boatloads of money down the road.

Put Forward Collateral Value

Lenders charge higher rates of interest on riskier loans. Making your business a less risky proposition will usually guarantee your business a better interest rate. The best way to present your business as less of a risk is to present the lender with collateral that promises you’ll repay the loan or forfeit the collateral. The more valuable the collateral, the less risk your business poses. Consequently, less risk will lead to better interest rates.

It is important to understand collateral value to get the best interest rate. In some cases, putting up enough collateral value will get you rates far below the average business loan interest rate.

Best Low-Interest Business Loans

Traditional Bank Loans

If you’re looking for low-interest business loans with better rates, look into a traditional bank loan. Traditional bank loans require patience when you apply, but with patience comes low-interest rates.

Traditional bank loan details:

Traditional bank loans are term loans that can have either fixed or variable interest rates and a set date for repayment. Payments are spaced out over a set period where you pay the same payment amount each month until the set date is reached.

How to apply for a traditional bank business loan:

1. Research business loan interest rates at nearby banks
2. Gather the necessary business loan documents needed to qualify for a business loan
3. Dress professionally
4. Visit the bank
5. Negotiate the loan
6. Apply for a business loan
7. Wait for a decision
8. Get access to funds

Advantages:

• Low interest rates
• Manage funds from your bank
• Link to your accounting software

Drawbacks:

• It takes time to qualify for a traditional business loan
• More paperwork and planning required
• Stricter credit requirements

Read our list of the best banks for small business loans.

SBA Loans

If you’re looking for low-interest business loans with better rates, look into qualifying for an SBA loan. Applying for an SBA loan requires even more patience than applying for a traditional bank loan, but this can result in even lower interest rates.

SBA loan details:

SBA loans are term loans and typically businesses apply for these loans through a bank, like a traditional bank loan. These loans are easier to qualify for because they are guaranteed by the U.S. Small Business Administration. SBA loan rates are regulated by the SBA but each lender can set their own rate so long as it fits into the SBA guidelines.

How to apply for an SBA small business loan:

1. Make sure you qualify for an SBA loan
2. Gather the necessary business loan documents needed for qualifying for an SBA loan
3. Find an SBA lender bank
4. Know the best time to apply
5. Dress professionally
6. Visit the bank
7. Negotiate the loan
8. Apply for an SBA business loan
9. Wait for a decision
10. Get access to funds

Advantages:

• Some of the lowest interest rates
• Less strict credit requirements
• Less risk for the bank lending the money
• Manage funds from your bank
• Link to your accounting software

Drawbacks:

• It takes time to qualify for an SBA loan
• More paperwork and planning than a traditional bank loan

Online Business Loan

Look into an online business loan to quickly shop for low rates and receive quick approval. Online loans require less time than a traditional bank loan or SBA loan. With a little effort, you can shop rates at hundreds of online lenders to find a rate that works for your small business needs.

Online loan details:

Online loans range from term loans that have fixed interest rates and a set date for repayment, to working capital loans that give you access to capital when you need it. Many online lenders provide merchant cash advances, invoice factoring loans, and other types of small business loans.

How to apply for an online small business loan:

1. Digitize your business documents, government-issued ID, and other required documents
2. Search out online lenders
3. Determine the best loan for your small business
4. Apply online through the lender’s website
5. Wait for a decision
6. Get access to funds

Advantages:

• Shop rates quickly
• Apply from anywhere
• Fast approval
• Fast access to capital
• More loan options

Drawbacks:

• Higher rates than traditional bank loans

The more informed you are about interest rates and lending options, the better chances you have of getting a business loan with a really great rate. Great rates come when you do your due diligence and work smart to build business credit.