Business Loan Rates Explained

Interest rates will vary based on:

• Your personal financial status (in some cases)
• Your company’s financial status
• The lender you use
• The type of business loan
• The loan term

There is no clear-cut answer to this, as mentioned rates will vary between lenders and business loan types as well as your own financial status.

While it’s worth shopping round and looking at a lenders representative rates, you will not know the exact rate you will achieve until you apply for the finance.

Representative rates are often advertised to show rates you may be eligible for, these rates are however only achieved by 51% of successful applicants. The remaining 49% of applicants usually get a higher rate.

If you are offered higher rates than expected, rather than focusing on APRs and interest rates, it is worth focusing more on how the cash will help your business. Ultimately, how much profit you will make from the money.

An annual percentage rate, also known as APR, is the annual cost of the loan.  Unlike normal interest rates, APR includes any fees and charges for the finance.

APRs give you a good indication of how expensive a loan is going to be. If your loan includes admin charges or other associated fees, these are reflected in the APR of the loan.

An illustration of APR: If you borrow £200,000 over 3 years at 11% APR.

The APR would include your annual interest rate as well as standard fees payable for the loan.

You would then pay 36 monthly repayments of about £6,500, totalling around £234,000 This includes the amount you borrowed plus interest and fees.

The above is just an example of APR and may not reflect what you achieve when applying for a business loan.

Loans from traditional banks: 2% to 13%

Loans from alternative lenders: 7% to 100%

Invoice finance: 13% to 60%

These are just average rates, you may be able to achieve lower rates than these depending on your financial status, profitability, and current market conditions.

If you are trying to achieve lower interest rates, there are a few things you can try.

Select a lower interest lender

Some lenders will offer lower interest rates than others if you pass their lending criteria. Be aware, that although lenders advertise low rates, this doesn’t mean you will achieve that rate.

Improve your credit score

Your credit score can affect a loan application outcome in terms of interest rates depending how good or poor your credit score is.

Lenders use your credit score as part their assessment to decide whether you pass their affordability criteria.

A low score can increase interest rates, as a low score increases your risk factor and lenders will increase rates to compensate this for.

If you have a poor credit score you will need to take steps in try and improve it.

Think about terms

Loan terms will have a direct impact on interest rates. Generally, short loan terms can attract higher interest rates then longer periods.

You need to consider how much you need to borrow and how quickly you want to pay it off. You also need to consider the maximum term available for the type of business loan you are applying for.

For example, a VAT loan is usually available over a maximum of 12 months, whereas an unsecured loan is available over 60 months.