A booming economy is great for the country but not for loan rates. The Federal Reserve Board (the Fed) keeps an eye on economic markers and adjusts federal interest rates up or down in response to changes.
An uptick in economic activity can send inflation out of control, so rates increase to regulate prices, spending and borrowing. While this reflects a positive trajectory for the economy as a whole, it increases the cost of taking out a loan and can put small businesses owners in a bind.
Rising federal rates pushed up business loan rates in 2019, and the trend may continue if the Fed follows through on an additional increase planned for 2020. Every time the federal interest rate jumps, it affects the rate banks charge on loans to their most creditworthy customers, known as the prime rate.
High rates make paying loans off more difficult, especially for businesses with shaky credit histories. If you need funding when the Fed’s rates are climbing, then you’ll have to find ways to compare all of your available options, rather than applying in one place.
What Is the Interest Rate on a Business Loan in 2019?
Loan rates depend on many factors, but you can get an idea of the average range to expect from various lenders as you begin your search for a funding source:
- Bank loans: 2% to 13%, with small banks starting at 2.48% and large banks starting at 2.55%
- SBA loans: 7.75% to 10.25%
- Online term loans: 7% to 100%
The type of loan you need also affects the rate:
- Short-term loans: 8% to 99%
- Intermediate-term loans: 6% to 30%
- Equipment financing: 4% to 12.75%
- Lines of credit: 8% to 80%
- SBA 7(a): 7.25% to 9.75%
- SBA CDC/504: 3.72% to 7.145%
- SBA microloan: 6.5% to 13%
- Invoice factoring: 13% to 60%
- Merchant cash advance (MCA) 20% to 250%
Additional fees increase the total cost of taking out a loan. These may include fees for origination, document processing, applying, service, and closing. Some lenders also charge late fees if you fail to make monthly payments on time or early prepayment penalties to make up for interest on the remainder of the term.
SBA loans have guarantee fees, and intermediaries may add more fees to the microloan program. Loan offers promising no extra fees should be scrutinized carefully to ensure nothing is hidden in the fine print.
Business owners with exceptional financial profiles may be able to secure rates lower than 6% with certain online lenders or find lower rates through targeted loan options.
Where to Find the Lowest Small Business Loan Interest Rates
For businesses able to meet the stringent qualification requirements, banks will almost always have the best loan rates. Online loans tend to cost slightly more, but are often the best choice, especially when you have an opportunity that requires cash in a short time window. They’re also the best way to go if your financial status doesn’t measure up to bank qualifications.
Online lending options are expanding and beginning to rival banks as top choices for business owners in need of cash. What does this mean when you’re comparing prices? You have to consider your company’s credit score, financial standing, revenue and history before putting in your first application.
If you’re confident you can qualify and wait out a long approval process, try a bank or SBA loan first. However, if you need funding in days or weeks instead of months, look for an alternative lender with:
- Few or no additional fees
- Experience in your industry
- Flexible loan terms
- Dedicated advisors who will search to find you the best rates
Focus on small business loans instead of popular “fast cash” options like MCAs, as these are often the most expensive. When you’ve narrowed down the options, compare your financial statements to each lender’s requirements to determine where you’re likely to qualify for the lowest rates.
Make calls or submit prequalification applications to get more details on available rates and terms. However, before starting any application process, find out what methods lenders use to check credit. A hard pull can knock your score down and make it more difficult to secure good rates.
How to Qualify for the Best Small Business Loan Rates
A strategic approach to budgeting and debt management can increase your chances of qualifying for better than the average small business interest loan rates. In addition to shopping around for the best value, you should also:
- Maintain a good relationship with the bank or credit union where you have your business account
- Pay bills, vendors and suppliers on time to improve your credit score
- Improve cash flow and increase revenue
- Obtain collateral to secure future loans
- Make a plan to pay down debt and bring your debt-to-credit ratio below 30%
- Apply for a business credit card to increase available credit and improve credit utilization
- Invest in credit monitoring to keep an eye on your financial situation
- Work with an accountant or use bookkeeping services to manage your budget
- Wait until your business has been established for at least one year
- Get your business plan and financial projections in order
- Consider incorporating to keep personal and business funds separate
- Choose loans made specifically for your needs, such as equipment financing
- Apply for loans with longer terms
Many of these same strategies help keep your personal financial situation under control, as well. Since your personal credit score and debt-to-credit ratio may affect your chances of qualifying for good loan rates, it’s important to be disciplined with the spending and borrowing you engage in outside of your business.
Find All Of Your Small Business Loan Options In One Place
Having a high credit score and solid financial picture is usually the best way to qualify for good loan rates, but it’s not always practical to wait to apply until everything looks perfect on paper.
Your business may require funding on short notice to cover unexpected expenses or keep operations going in an emergency. In these circumstances, you can’t wait for a bank to go over your application and simply hope you’ll qualify for their lowest small business loan rates.
Fintech lenders like National Business Capital are there when you need funding in a pinch. Through a global marketplace of lending partners, National can find the best rates on the loan you need for your business and deliver funds in just a few days. Regardless of your credit score, you can get access to small business loans with flexible lengths and terms.
Discuss your needs with the team at National, and get started with the application process to find the lowest rates for your business.