As a small business owner, finding the right financing is crucial. Business loan rates vary by loan type, so it’s important to know what options are available and how much they’ll cost you. Here’s what you need to know about what interest rates to expect and a brief definition of various loan types.
Business loan interest rates by loan type
As you search for a business loan for your company, you’ll come across several different types of lenders and loans.
Loans that come from traditional lenders typically charge the lowest interest rates, but they also tend to have stricter criteria for approval and can take several weeks to get approved. On the other side, online business loans and other types of loans charge more in interest but are easier and faster to get.
Here are some interest rates you may come across as you compare various business loan options.
Business Loan Interest Rates
|Loan type||Interest rate|
|Traditional bank loans||4% to 13%|
|Short-term loans||6% to 30%|
|Intermediate-term loans||8% to 30%|
|Business lines of credit||8% to 30%|
|Equipment financing||4% to 20%|
|Invoice financing||13% to 60%|
|Merchant cash advance||20% to 250%|
If you’re not familiar with some of these loan types, here’s how each of them works and can help your business.
Typically long-term loans of up to 10 years or even longer (bank loans) provide low interest rates but require a solid personal and business credit history and a strong track record from your business. They’re typically best for long-term expansion planning.
If you’re having cash flow problems or need to cover working capital, short-term business loans may be able to help better than credit cards. These loans are typically due within a few months to a year and charge higher than bank loan interest rates. That said, they typically don’t have a high credit standard. Short term loans are great for inventory or unexpected opportunities or emergencies.
If you need some money to expand your business but not a lot, intermediate loans can be a simpler way to get funds without a long repayment term. You’ll typically have between a year and five years to repay what you owe.
And while some intermediate-term loans can be more expensive they may be easier to get than a long-term bank loan.
Business lines of credit
A line of credit allows you to take periodic withdrawals when you need them rather than getting a big lump sum at the beginning. They’re an excellent choice if you prefer having “piece of mind” access to financing when you need it – for unexpected opportunities or emergencies.
Lines of credit can be relatively expensive in some cases, but they can offer low interest rates from the right lenders and with the right credit situation.
As the name suggests, equipment financingg is designed to help you purchase a physical asset. You’ll typically need to put money down on the loan, and the lender reserves the right to repossess the equipment if you default.
Equipment loans typically offer inexpensive financing because they’re secured by a physical asset the lender can sell to satisfy what you owe. To qualify, though, you may need a solid credit history, time in business and revenues.
If you need cash now and won’t receive payment from your accounts receivables soon enough, invoice financing can help. A lender will offer to provide financing up to a certain percentage of an outstanding invoice, typically requiring that the payment come due when the invoice is paid in full.
This form of financing is significantly cheaper than other short-term financing because it’s secured by the invoice. However, some lenders can still charge high interest rates, especially if your business is relatively new or your credit history is less than stellar.
Merchant cash advance
This type of loan is an advance on future credit and debit card sales and can be one of the most expensive forms of business financing. Merchant Cash Advances are relatively easy to get, even if you’re a new business owner and don’t have great credit.