Introduction
A variety of different lenders can offer your business loans, which come at many different interest rates.
Many factors can affect the interest rate that you are offered; including the size of your loan, the duration of the loan you want to borrow, whether the loan is secured and how good your credit score is.
In this guide, you’ll find out everything you need to know about business loan interest rates, including what they are and what affects them.
What’s in this guide?
Let’s take a closer look and find out.
FAQ
What are business loans?
In short, it’s when you ask a lender like a bank to loan you some money so you can pay for things like more employees – in return, you will pay back this money often over a set period.
You may need to pay an amount of interest.
Interest is when you have to pay back a sort of payment for borrowing that amount of money.
But, it can be quite confusing so this article will let you know everything you need to know about interest rates.
Business loans could come from many different places, so as a business owner you should always try and consider as many possible solutions as possible to find the best deal.
When would I need a business loan?
A business loan could be instrumental to keeping your business afloat when there are unexpected delays in receiving the payment invoices, or a tax suddenly creeps up on you.
Short-term loans could be the quick injection of cash that you need, but you should always keep an eye on what kinds of interest rates you need to expect.
Plus, y should always compare your options, so click here to find out what kinds of loans you could secure today.
What are business loan interest rates?
Interest rates refer to the percentage of the loan that you will be charged for borrowing money.
For instance, according to the helpful calculator on the Barclays website, if you borrowed £25,000 for 24 months (2 years), your monthly repayments would be £1,137.08 a month.
This means you would be repaying a total of £27,289.92.
That is an 8.9% pa (fixed) – in other words, the interest you’re paying is £2,289.92.
You can opt to have a 6-month repayment holiday, which means you wouldn’t make any payments during the first six months, but it also means that you will incur interest during this time.
So if you do that, you’ll be repaying more in the long run.
What affects loan interest rates?
So, what affects your loan interest rates?
- Capacity
- Type of business
- Collateral
Capacity
Your size often refers to how much money your business can borrow; so how much your business can pay back, and how fast.
This is often calculated by different lenders comparing monthly liabilities and general monthly revenue.
How long your business has been operating and how long it has been making the profit can also make a significant difference.
Usually, lenders will ask for at least three years of accounting evidence before they will give you a business loan.
Type of business
The kind of business you have is often a determining factor when it comes to whether you can get a loan, and how much your interest rates will be.
This is because certain lenders believe that some industries are more secure than others, so if your business is considered risky, you might have to pay more for it.
Collateral
Sometimes, your business loan may require some security.
This means that you may have to put your home up for collateral, in the instance that you don’t repay your loan.
You can usually offer assets such as your home or perhaps your car.
Often for smaller loans, you don’t need to secure your loans with anything which makes them perfect for smaller businesses.
What are variable interest rate loans?
Lenders will usually offer you businesses loans that come with an interest rate that varies due to an index rate.
These types of repayments can vary over the year, which makes the amount that you may need to pay back unrealiable to predict as it could change from month to month.
Interest rates can fall, but this is usually rare.
There is also a higher risk that interest rates can also increase which will cost you in the long run, and should definitely be considered when looking at variable rate loans.
What is the average interest rate?
According to many reports from different sources, the average interest rate it typically between 4% and 5%.
Of course, this can vary depending on the type of lender that you choose to get your loan from, but for a handy guide see the table below in the interest rate comparison section where you can find out more.
For instance, Shawbrook Bank can offer APR between 0% and 19.9%, whereas Funding Circle which is a peer-to-peer lending platform can usually offer their customers 4.5%.
What are fixed interest rate loans?
Fixed rate loans won’t rise or fall based on the index rate, so you can budget easier knowing that your repayments will remain the same.
These are the most popular types of loans that often have a repayment term of around one year to ten years. And you can use collateral like your home as security.
You are protected from potential rising interest rates, however, if they fall you won’t benefit either.
Which interest rate loan would be best for me?
It is hard to say which interest rate loan would be best for you, as it depends on so many different circumstances and your personal preferences.
However, it is important to remember that opting for a variable rate loan is usually riskier than a fixed rate loan.
This is because you will run the risk of having to pay more interest depending on which way the market sways, and benefitting from a decreased interest rate is rarer.
Fixed interest rates can protect you from rising interest rates, so this is usually better for businesses that need a lower risk loan.
It could also depend on the funder themselves, as with many government loans, for instance, you can also benefit from getting free advice and mentorship.
What are the term lengths?
A short-term loan will have the highest interest rates, so it makes financial sense for the lender.
However, longer-term loans will usually have the lowest interest rates, as you’re borrowing for a more extended amount of time and will likely be paying back more either way.
But you should keep in mind that longer length loans will probably mean you pay back more than with short term loans.
Even if the interest rates are lower, you have to keep in mind that you might be paying years more of interest rather than just for a few short months.
Interest rate comparison
For a look at APR which often includes interest, take a look at the table below.
| Company | Trustpilot Score | Loan Amount | Loan Term | Typical APR |
| Boost Capital | ★★★★★ | £3,000 – £500,000 | 4 to 18 months | 1.5% – 2.5% |
| Funding Circle | ★★★★★ | £5,000 – £500,000 | Six months to 5 years | 4.50% |
| Capify | ★★★★★ | £3,500 – £500,000 | 6 to 10 months | 67.89% |
| Shawbrook Bank | ★★★★★ | £250,000 to £25 million | Bespoke | 0% to 19.9% |
Top 5 business loan providers
1. Boost Capital
Type: Alternative Finance Provider
Loan amount: £3,000 – £500,000
Typical APR: 1.5% – 2.5% monthly APR
Loan term: 4 to 18 months
Boost Capital is a highly recommended alternative finance provider in the UK, with many customers giving this lender five stars on trusted websites such as Trustpilot.
They offer fast funding, with minimal paperwork, approval in 24 hours and access to your funds in around two days.
Representative: Borrow £10,000 for 12 months at 47.9% representative APR. Interest rate of 36.74% p.a. (fixed). Total amount payable is £12,100.
Company rating on Trustpilot: 5 / 5
2. Capify
Type: Alternative Finance Provider
Loan amount: £3,500 – £500,000
Typical APR: 67.89% APR
Loan term: 6 to 10 months
Capify is another highly rated lender, who has been around since 2008 and they have helped thousands of business owners to grow and sustain their business.
Focused on small to medium enterprises, they aim to give you a decision within 60 seconds and solutions tailored to your business.
Representative: Borrow £24,000 for 12 months at 67.89% representative APR. Total amount payable is £29,472.
Company rating on Trustpilot: 5 / 5
3. Funding Circle
Type: Peer-to-Peer Lender
Loan amount: £5,000 – £500,000
Typical APR: Rates start from 4.5% per year AER
Loan term: 6 months to 5 years
Funding Circle is one of the peer-to-peer lenders that have been sprouting up around the UK in the last few years.
With a peer-to-peer platform, the lenders are regular citizens that want to help their savings grow by investing in UK businesses.
For businesses, this means low AER and only a couple of extra fees.
Representative: Borrow £20,000 for 12 months with fixed monthly payments of £1,752 a month, with a completion fee of 2.5% and interest of around £526. Total amount payable is £21,026.
Company rating on Trustpilot: 5 / 5
4. Shawbrook Bank
Type: Bank
Loan amount: £250,000 to £25 million
Typical APR: 0% to 19.9% APR
Loan term: Bespoke repayments
Shawbrook Bank offers their business customers a range of services tailored to their companies, like asset finance, working capital solutions, the point of sale finance and structured finance, as well as commercial mortgages too.
This means that for startup businesses you could finance for the road ahead with equipment and salaries, or even established companies can benefit from more substantial amounts to help you fund expansions.
Company rating on Trustpilot: 5 / 5
5. Government Startup Loan
Type: Government Loan
Loan amount: £500 – £25,000
Interest: Fixed 6% interest p.a.
Loan term: 1 year to 5 years
Government loans are loans that are funded by government-backed organisations, who usually offer either regional or national businesses different loans depending on their location.
With this loan, in particular, it is aimed at startups less than 24 months old who could benefit from not only finance but mentoring, to help your business grow and thrive.
Representative: Borrow £20,000 for 12 months with fixed monthly payments of £1,721.33 a month, with interest of around £655.94. Total amount payable is £20,655.94.
Company rating on Trustpilot: 5 / 5
The top five business loan providers take into consideration their customer reputation, the amount you can borrow and the typical APR or interest rates, to ensure that you’ll be getting the best deals for you and your company.
Conclusion
When it comes to interest rates, they usually vary depending on the type of lender that you choose for your business loan.
For example, in the table above you can see that Boost Capital can offer an APR that could be as low as being between 1.5% and 2.5%, while Shawbrook Bank offers their customers APR that could be as high as 19.9%.
To figure out which lender might be best for you, take a look at the ExpertSure guides to find out more.
