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Business loan interest rates: what you should know
High interest on business loans can disrupt your company’s cash flow. Learn how to reduce costs and manage repayments.
A business loan can give your company a strong start or fuel growth, but interest charges can build up quickly. We break down how business loan interest rates work so you can manage borrowing more effectively.
Find the right loan for your business
What are business loan interest rates?
When you take out a business loan, it comes at a price. This is known as the annual percentage rate (APR), which includes fees and the total interest rate charged over the loan term.
Lenders offering loans must publish a representative APR on all information advertising their loans. This is the rate they charge at least 51% of applicants, and it offers a handy way to compare what’s on offer.
How are business loan interest rates set?
Loan interest rates aren’t plucked out of thin air – they are based on the Bank of England base rate. This is the interest rate the Bank of England charges financial institutions to borrow money. Lenders pass on this level of interest, plus some extra to cover their costs and make a profit. To arrive at their decision, they consider the following:
Type of loan
There are several types of business loans and they fall into two categories:
Secured loans
Secured loans typically offer lower APRs than equivalent unsecured loans because the borrower puts up an asset as collateral. This is usually their business premises, but it could be work vehicles, machinery or even their home.
Secured loans are relatively risky for the borrower because the lender can take their named assets if they fail to repay the loan.
Unsecured loans
Start-ups and some longer-established firms often don’t have enough assets to satisfy secured loan requirements, or the owners don’t want to tie property and resources to the loan. Instead, they may choose an unsecured loan.
Given the higher risk to the lender, who can’t seize assets if a company defaults on payments, APRs are normally higher on a like-for-like basis than secured loans.
Fixed vs variable rate loans
Secured and unsecured business loans are available with fixed or variable interest rates.
Fixed-rate loans
These lock you into a rate that doesn’t change, making it easier to plan ahead and cover payments. The downside of fixed-rate loans is that if the Bank of England base rate drops, you pay more than if you had a variable-rate loan.
Variable-rate loans
With this type of loan, your interest rate tracks changes in the Bank of England base rate. This means it can prove cheaper than a fixed-rate loan if the Bank’s rate falls, or more expensive if it rises.
Loan amount
Business loans are usually available from £1,000 to upwards of £50,000, although you can find lenders offering £1 million or more to borrowers who meet their eligibility criteria.
Loan term
While business loans are typically available for one to five years, certain specific loans, such as bridging loans, can cover a shortfall of a few days or months. Other loans can help fund longer-term projects.
Interest rates are usually lower for longer term loans because lenders want to attract customers whose total interest repayments are likely to be greater over time.
Those urgently in need of a short-term financial boost are more likely to accept higher-interest-rate loans. They might need the money to pay staff wages because a client fails to settle an invoice on time, for example.
Type of customer
When you apply for a business loan, the lender runs a check on your credit report. They scrutinise your financial track record, paying attention to any previous loan defaults, county court judgments and your business and personal levels of debt.
On the plus side, they look favourably on a history of taking out loans and making full repayments on time.
As well as your credit history, financial providers base their decision to lend, and at what interest rate, on several factors, such as:
Trading history – How long have you been in business and running your current firm?
Business plan – Do you have a solid reason for the loan, which you have supported with documentation?
Business profile – Are you operating in a sector lenders consider to be high or low risk? For example, lenders deem the hospitality and agriculture sectors more volatile than childcare and healthcare
Personal guarantee – Are you willing to cover business loan repayments out of your own pocket?
The lender
Each lender is different. Some specialise in offering large amounts, such as £1 million plus, while others operate at the other end of the scale. Likewise, some focus on loans to particular sectors and have vast amounts of expertise in these borrowers’ typical requirements.
Dozens of lenders offer loans to small businesses, and can be found through brokers, search engines and comparison sites.
How to get the best rates for a business loan
There’s no hard and fast rule for finding the best business loan rates, but these tips may help you land the right business loan at an affordable interest rate:
Plan ahead to improve your credit score – Getting on the electoral roll, clearing debts and chasing outstanding client payments all help, as can avoiding any credit applications for at least six months
Use a business loan interest calculator – This enables you to compare monthly and total repayments on loans of slightly different sizes and durations. You may pay next to nothing extra in interest for a loan that gives you more time to repay, or you could save a small fortune by opting for a slightly smaller loan
Shop around – Don’t just focus on the interest rate, but read the terms and conditions, too, taking note of any early repayment options and charges
Run eligibility checks before applying – Doing so doesn’t damage your credit report
What are start-up loans?
If you’re about to set up your first business or your company has been running for less than 36 months, you may want to consider a government-backed start-up loan. These offer unsecured loans of between £500 and £25,000 for one to five years, with interest fixed at 6%.