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Small business loan interest rates vary widely. The rate you pay will depend on several factors, including the type of loan or finance you take out, the repayment terms of the deal, and the competitiveness of the offer compared to the rest of the market.

In other words, there’s really no such thing as an average interest rate on a business loan.

Therefore, it’s important to shop around for the right deal at the right price when searching for business finance for your SME.

What is an interest rate in business finance?

There are lots of different ways to finance your SME. But whichever type of business funding you choose, it will almost certainly involve borrowing an amount of money on the understanding that you repay that amount in full plus an additional sum set by the finance provider.Ìý

When it comes to business loans, the lion’s share of this additional sum is usually made up of interest on the loan.

So, a lower interest rate is generally an indication of a cheaper deal – although it’s important to also consider any extra fees when comparing business loans.

Impact of interest

For example, imagine you borrowed £10,000 over three years. If you agree to pay a fixed interest rate of 9%, you would have to repay a total of £11,389. This puts the cost of the loan – excluding any fees – at £1,389.

However, if you agreed to pay a fixed interest rate of 12%, the cost would be £463 higher at £1,852.

What is the representative APR on a business loan?

The representative APR (Annual Percentage Rate) is the headline interest rate lenders use to advertise credit deals, including business loans.

However, that doesn’t always mean it’s the interest rate you will pay – even if you are accepted as a borrower.

Banks and other lenders only have to offer the representative APR to 51% of those approved for a loan.

The other 49% will often be charged a higher rate - perhaps because they have a lower credit score.

So, it’s always worth double-checking the interest rate on your business loan offer before taking the plunge.Ìý

How do lenders set business loan interest rates?

Banks and lenders set their loan interest rates according to the market - i.e. what their competitors are doing.ÌýThis, in turn, is guided by the Bank of England base rate: an interest rate set by the UK central bank to reflect the country’s economic state at the time.ÌýAs a result, when the base rate increases, so does the average cost of borrowing money – for both companies and individuals.Ìý

The base rate is currently 4.75%. That’s relatively high compared to recent years – in 2020, the base rate fell to a historic low of 0.1%. However, it’s still quite low compared to the 1980s, when the base rate was above 10% for much of the decade.

Other factors that will impact the interest rate you pay on a business loan include:

• Your personal or business credit rating

• How long you have been trading

• How high your turnover is

• What other debts you have

• How much money you want to borrow

• How quickly you need the cash

• How long you want to take to repay the loan

What is a good rate of interest on a business loan?

As explained above, how much you pay to borrow money to fund your business will depend on a range of factors, not least the type of finance deal you choose.Ìý

For example, standard, unsecured business loan interest rates start at about 6% (correct January 2024) and go up to 15% or more.

But if you want to start a business – or grow a business that has been trading for under a year – you’ll need a start-up loan.Ìý

These are available from specialist providers, as well as the government’s scheme, which offers fee-free loans of up to £25,000 over one to five years at a fixed interest rate of 6%.

That’s a good rate in the current market. The interest rate level is not the only thing to check, though.Ìý

You also need to consider whether it is a fixed rate that will remain the same throughout the loan term or a variable rate that could go up or down depending on which way the loan market goes.

Remember that while loan rates are often lower on longer-term deals, paying interest for longer could still mean paying more interest overall.

And don’t forget to factor in any fees, as these can make a big difference to the total cost of a business loan.

How can I get a better interest rate on a business loan?

Shopping around for the cheapest business finance deal is one of the best ways to ensure you pay the lowest business loan rate.

Other steps you can take to improve your chances of being approved for a cheap business loan include:

• Paying down any other debts before applying – lenders generally prefer customers with a low level of indebtedness 

• Offering a personal guarantee – agreeing to repay the loan yourself if the company can’t  – is one way to access better deals

• Putting up a business asset as security – secured loans, where you offer an asset, such as a property or a vehicle, as collateral, often come with lower rates

• Checking your personal and business credit ratings – sometimes simply correcting little mistakes or updating information on your file can improve the score

If you're a sole trader, having separate bank accounts for your business and personal expenses will make it much easier for lenders to process your business loan application.Ìý