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The Average Interest Rate On A Business Loan

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Last editedJun 20212 min read

Finding the best interest rate for your business loan

Borrowing money is a fact of business life, and debt isn’t necessarily a dirty word. If you run a business you will need an injection of cash occasionally, and taking out a business loan is often the simplest and quickest way to access that cash. Sourcing the best loan rates is important, and the process will depend upon the type of business loan you need. 

What kind of business loan will you need?

Finding the best business loan rates will depend upon the sort of business you run and the type of business loan you’re looking for. The commonest business loans include:

  • Startup loan – borrowing the money you need initially to get a business up and running

  • Short-term loan – borrowing money to cope with cash flow issues that might be affecting your business

  • Long-term loan – borrowing the money you need to expand the business

The business loan rates you’re offered will depend on not only the type of loan you need but also the financial state of your business. Even allowing for these factors it is always worth shopping around for the best loan interest rates as different lenders offer varying deals. For a business still in the earliest stages the UK offers government-backed loans provided by the Start-Up Loans Company. Formally classified as personal loans given for business reasons, these are unsecured loans of up to £25,000, offered at a fixed rate of 6% and with a loan term of one to five years.   

Factors that can affect business loan rates 

Alongside the type of loan being sought, the interest rate offered will be affected by factors such as whether the loan is secured or unsecured:

  • Secured loan – a secured loan is one that is provided based on an asset – such as property, a vehicle or machinery – which the lender will be able to pursue if the loan isn’t repaid. 

  • Unsecured loan – unsecured loans aren’t backed by an asset, but sometimes the lender may ask for a “director’s guarantee” that gives the right to pursue a director for monies if the loan isn’t repaid.

The range of business loan rates offered

Firstly, you should plan a thorough overview of current business loan rates – it is always best to shop around and consult as many potential lenders as possible. Currently, the average interest rates charged by lenders for specific types of business loans fall into these categories:

  • Loans from traditional banks – 2% to 13%

  • Loans and financing from online lenders – 7% to 100%

  • Invoice financing – 13% to 60%

Note that the headline interest rate doesn’t cover any additional fees that lenders may charge such as, in some cases, penalties for early repayment. Business owners should always ensure that their borrowing decisions are based upon a full understanding of what the loan will cost, rather than being based purely on the most competitive interest rate. 

Steps you can take to improve the interest rates you’re offered

As well as shopping around, business owners can take positive steps to ensure that they pay the lowest possible interest rate on any business loans:

  • Improve your personal credit, particularly if the business is relatively new and/or small

  • Compare lenders

  • Seek out secured loans

  • Pay over the shortest term possible and affordable

  • A variable interest rate will be lower than a fixed rate, but comes with the risk it could rise in the future 

We can help

Borrowing money to finance your business is often the first step toward growth and innovation, but it only makes sense if you can keep the cash flowing in. Partnering with a payment platform like GoCardless makes this as simple as possible, and this includes the more complex aspects such as dealing with ad hoc payments or recurring payments.

Over 85,000 businesses use GoCardless to get paid on time. Learn more about how you can improve payment processing at your business today.

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