June 21, 2023 By Kristin Woodward

When it comes to securing financing for your small business, understanding the interest rate is generally key for comparison shopping, cost evaluation, and financial planning. Knowing the current interest rate for different loan products may help small business owners make the best decision for their business. Here’s what you need to know.

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SBA 7(a) loans

SBA loans are generally considered the “gold standard” in small business funding because of their favorable terms, flexibility, and government backing. The Small Business Administration limits how much lenders can charge for interest rates. Lenders calculate the maximum rate by adding the Prime Rate, determined by the Federal Reserve, with an additional markup.

As of June 2023, loans offered through banks in the SmartBiz network have a variable interest rate based on the Prime Rate, plus an additional percentage determined by the size of the loan. See our current rates.

Bank term loans

Another common source of funds for small business owners is bank term loans. They typically offer lower interest rates compared to some other forms of financing, longer repayment terms compared to other types of loans, and structured repayments, allowing for financial planning.

Depending on the specific loan product and financial institution, interest rates may vary. The interest rate may also depend on the loan term and the applicant's credit and financial profile. Bank lenders often charge competitive interest rates, especially when compared to “alternative” lenders who offer convenient yet pricey loan products.

Business lines of credit

While business lines of credit are typically advertised as having low interest rates, you might find that they’re actually much costlier than they seem. Rates may vary wildly, and since lenders aren’t required to display their rates, it may be tough to pinpoint an average or even comparison shop. Your interest rate will generally depend on the lender you choose and your business finances. 

With a line of credit, the fact that you are able to withdraw funds as you need them may be both a blessing and a curse. While the system is convenient and easy to use, the costs you’ll face might negatively affect your business’s cash flow. For more in-depth information, check out this post from our blog: How Does a Line of Credit Work and When is It Useful? You’ll learn pro tips to get the most out of a line of credit.

Equipment financing

When it comes to equipment financing, you may apply the proceeds from bank and SBA-guaranteed loans to make purchases. If you’re looking specifically for a business equipment loan, though, interest rates vary widely. The actual rate depends on various factors and may sometimes grow over time. Make sure you know exactly what the lender will charge so that you avoid unexpected charges that could negatively impact your business cash flow.

Exploring a low-cost loan, like an SBA loan, for equipment purchases may be a good strategy. In addition to purchasing equipment, proceeds from an SBA loan may be used in various ways – from high-cost debt refinance to marketing.

SmartBiz offers custom financing options to help small businesses with unique challenges find the financing options that work for them. Depending on your specific situation and equipment financing needs, these may also be a good option.

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Factors affecting interest rates

The different interest rates you’ll encounter will primarily be determined by the lender you work with. Generally, here are some of the key characteristics that will affect your interest rate:

Credit scores

It’s probably not a surprise to you that both your personal and business credit scores will matter when it comes to getting the terms you’re looking for. These numbers help provide lenders a picture of your borrowing history and help them determine how risky the loan will be. The less risk, the better the deal often is.

Loan specifics

The loan term, simplicity of the application process, and how fast you get funded are all factors that may influence your final interest rate. You’ll generally have to face a tradeoff between ease and cost. Typically, with great convenience come high interest rates and fees. On the flip side, putting in more work to prove that you’re eligible may lead you to lower rates and longer terms.

With SmartBiz, you don’t have to make those sacrifices. You’ll get the benefit of a clear, streamlined online application, fast funds, and a low-cost SBA loan. Get your business credit scores in 5 minutes and you’ll be ready to start the process.

Revenue trends

Lenders generally want to see a business that’s on track in terms of revenue so that they have enough available cash flow to cover the expenses of the loan payments. If you are able to show that you’re growing and profitable, this may give you an advantage when searching for the rates and terms that work best for you.

Read more about what business revenue trends are and how they’re calculated. You’ll learn how business revenue trends are considered a more valuable measure of financial health than just flat revenue numbers per year. Banks typically prefer to lend to growing businesses because they are less likely to default on their debts.

Market trends

One important aspect that typically doesn’t change is current market rates. With bank and SBA loans, you’ll find that interest rates are tied to the Prime Rate. This percentage is set by the Federal Reserve and typically serves as a minimum to which lenders can then charge an additional spread. Find out what rate increases may mean for your loan.

Borrow with confidence

No matter what financing option you’re considering for your business, understanding what you’ll owe should inform your decisions. Look at the Annual Percentage Rates (APRs) for an even more accurate picture. With all the fees and additional costs taken into account, this number will typically reveal exactly what you’ll really be paying every year. Make sure your lender is transparent about these calculations, so you are able to plan ahead.

Interested in learning more? You can find out more about SBA loans through SmartBiz and even use our calculator to see the APR and monthly payment for your working capital or debt refinance loan.

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