Business loan

Average business loan rates 2022: what you need to know

The average business loan interest rate ranges from 3.19% to 6.78% at banks, according to the most recent Federal Reserve data.. But the rates depend on many factors.

Understanding small business loan costs can put you in a better position to choose the best option and save money as a business owner. Here’s what to know about business loan rates and fees.

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What is the interest rate for a business loan?

The interest rate on a business loan is basically the amount a lender charges you for financing. To find low interest business loans, shop around, as the following can affect the rates you are offered:
  • The lender. Small business bank loans usually have the lowest rates but tough terms. Online lenders have looser eligibility criteria but cost more: interest rates on some types of online business loans can range from 7% to 99%.
  • Your financial situation. The lender will look at traditional business loan requirements, such as your credit score, time spent in business, and business income. If you appear to be a risky borrower, the rate you are offered will likely be higher.
  • Your guarantee. Lenders may offer you a better rate if you secure your loan with commercial collateral, such as inventory or property. This reduces the lender’s risk as they can seize these assets for non-payment.

Market conditions, the total amount borrowed and the length of the repayment period can also influence interest rates on business loans.

Is a small business loan fixed or variable interest rate?

A small business loan can have a fixed or variable interest rate. With a fixed rate loan, the interest rate and monthly payment do not change over the life of the loan, making it easier to budget for repayment.

Lump sum term loans usually have fixed rates. This type of loan is ideal for one-time business purchases and long-term financing needs, such as financing a major business expansion, purchasing real estate, or refinancing debt.

A variable rate loan may have a lower initial rate than a fixed rate loan, but that rate may go up or down because it is linked to an underlying index that fluctuates with the market. This means that your payments may vary, which can make budgeting difficult.

A business line of credit may have a variable interest rate. It allows you to borrow money and pay it back continuously, just like you would with a credit card. This type of loan is best suited for business owners who do not need a fixed amount, but need easy access to cash, either for emergency funds or working capital. short term.

How much are the loan fees?

Business loan fees are often unavoidable and can make borrowing more expensive. Small business lenders charge varying amounts for upfront fees depending on factors such as the size of your loan, the length of the repayment term, your credit score, and the type of business loan.

Here are some common fees that may be included with a small business loan:

  • Original fees. Initial fee charged for processing a new loan.

  • Subscription Fees. Fees charged by underwriters who review and verify documents you have provided, including financial statements, personal bank statements, credit reports and tax returns.

  • Closing costs. Fees associated with servicing the loan, such as loan origination fees, commercial real estate appraisal or business valuation.

  • SBA Loan Guarantee Fee. SBA loans typically come with a guarantee fee of 0% to 3.75%, depending on the size of the loan. Annual service fees can vary from 0% to 0.55% depending on loan size.

How to compare business loan rates

The best way to compare business loan rates is the annual percentage rate. It includes not only the interest rate but also the associated loan fees mentioned above.

It’s important to keep in mind, however, that not all lenders use an APR when quoting the cost of their products. Some lenders may give a simple interest rate – which does not include loan fees – which is charged on a monthly or weekly basis.

Short-term lenders and merchant cash advance providers, on the other hand, may charge a factor rate, which is multiplied by the amount of principal you receive to determine the total cost of your funding. Factor levels typically range from 1.1 to 1.5 and often result in high APRs.

You should always try to calculate these types of interest rates into an APR to better understand the cost of a loan. APRs also make it easy to compare products from different lenders so you can make sure you’re getting the best deal for your business.

Example of commercial loan interest rate

For example, suppose you have excellent credit and are approved for a $50,000 business loan with a term of five years and an APR of 15%. On this loan, you will make monthly payments of $1,190 and pay a total of $21,370 in interest.

What if you shop around and get a loan offer at a lower rate? With an APR of 10%, your monthly payment would drop by $128 and you’d save $7,629 in total interest charges, according to NerdWallet’s business loan calculator.

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