A business loan is an amount of money a lender such as a bank or alternative funding provider offers a business. The loan is then taken on terms provided by the funder and paid back over a period of time with interest. The type of business loan you apply for is likely to depend on your business circumstances and why you need the money.
You can apply for a start-up loan to help get your business off the ground, a short-term loan to help ease cash flow issues, or a long-term loan to fund the expansion of your business, for example.
What interest rate can you expect from a business loan?
The interest rate on a business loan is largely determined based on an independent assessment of your circumstances. There are literally thousands of unsecured business loans available to business owners on the market right now with interest rates ranging from a few percent to over 10 percent, with large variants of rates due to the large marketplace. Arrangement fees are also another cost to be taken in to account with unsecured loans.
The average interest rate on a conventional small business loan is around 4% to 6%, though with that said, obviously interest rates will vary among lenders and there are a lot of factors that can contribute towards those differences.
Value Penguin says that you should consider multiple aspects before applying for a business loan, “We’d caution against automatically applying for the cheapest financing you qualify for, as cost isn’t necessarily the only factor to consider. You’ll need to consider the size of each loan, the repayment structure, the approved use case of each loan and more”.
What is an interest rate?
An interest rate is the percentage of money a lender will earn back from the amount you borrow. So, if the interest rate is 7.1%, the lender will receive the amount you borrow back plus 7.1%. The annual percentage rate (APR) is simply the way lenders describe the cost of borrowing over a year.
Interest rates affect most of us. You might not realise it, but a change in interest rates can impact your day-to-day life; from the cost of getting a loan, through to the prices of everyday goods. An interest rate is a percentage charged on the total amount you borrow or save. Even a small change in interest rates can have a big impact. It’s important to keep an eye on whether they rise, fall or stay the same.
If you’re a borrower, the interest rate is the amount you are charged for borrowing money – a percentage of the total amount of the loan. You can borrow money to buy something today and pay for it later. Interest is what you pay for the privilege. It’s a bit like hiring a car. Interest is what you pay to ‘hire’ someone else’s money. If you’re a saver, it’s the same except the interest fee is paid to you – because banks are paying to hire your money.
The Balance states that, “Interest is calculated as a percentage of a loan (or deposit) balance, paid to the lender periodically for the privilege of using their money. The amount is usually quoted as an annual rate, but interest can be calculated for periods that are longer or shorter than one year”.
What’s a good rate for unsecured business loans?
When you borrow money, you will pay back the amount you borrow plus the interest. It is the interest that allows the lender to earn money. This is how lenders make a profit from lending money by getting more back in return. With that in mind, if you borrow an amount between £10k and £500k for your business, an interest rate of 5 to 10 percent is typical. This is sufficient to allow the lender to earn money on the product while keeping your repayments affordable.
Anything lower than 5 percent is considered exceptional. An annual percentage rate (APR) of 3.6%, for example, is very desirable. However, high-street banks rarely offer such enticing interest rates. For low, low rates, independent lenders are best. Nationwide Corporate Finance who lend to limited companies are a good example of such an independent lender.
High street banks won’t match that on an independent lender because they believe the stature and reputation they’ve acquired over the years is more than enough to make people go straight to them rather than considering what is quite frankly, a much better alternative. If you go to the high street in search of a low rate like you may get from an unsecured business loan lender, you’ll end up disappointed and met with talks of collateral backing, instantly putting pressure on every choice you have to make.
Long term vs. short term business loan
You’ll also need to make a decision about your loan for business term, which is the length of time that you have the loan for. This is likely to depend on what you need the small business loan for, and how quickly you think you’ll be able to repay it. Different lenders have different minimum and maximum loan terms, and the term you’re offered may depend on your circumstances. Gone are the days when you had to have business banking to get a loan from that bank.
Credit cards are useful for short term borrowing but this is not a total fix as the interest rate will be high. Personal loans are an option if you are a sole trader and do not operate under limited company status. Peer to peer has long been around for companies to gain finance, with companies ties like funding circle this is an option worth checking out.
With our business funding, you can expect within 24 hours of completions to have the funding supplied to your account. Once you have received the loan, the repayments will be made in monthly instalments, with interest rates included. The application process is carryout online and is quick and simple. The whole application process just takes a few minutes.
How do lenders determine interest rates on business loans?
The interest rate you expect to pay on a business loan depends on a few factors, so consider these carefully before applying for any single one in particular.
Bank of England: The Bank of England sets the bank rate or base rate for interest, which directly influences the interest rates set by banks and independent lenders. If the base rate goes up, it is likely banks will also raise their loan prices. If the base rate goes down, then banks can lower their entry-level interest rates for new customers.
Your credit score: Your credit score is a 3-digit number that determines how likely you are to be accepted for credit. The score is based on your credit history. A low credit score carries a higher financial risk for lenders, who then raise the interest rate accordingly.
Loan market conditions: It is a fact that in times of uncertainty and financial turmoil, banks like to ‘shut up shop’ and reduce the amount they lend to new customers. This is achieved by either removing products from the market or raising interest rates.
Loan term: Although this does not play a factor with all lenders, how long you want to take to repay the amount you borrow can influence interest rates. The shorter the period of the loan, typically the higher the interest rate will be with come lenders.
Applying for a Business Loan
Applying for a business loan takes just a matter of minutes, and our dedicated account managers are on hand to help with anything you’re confused about. If you need guidance through the application process, we are on hand to help at 01246 233108.
Click to apply. You will be redirected to a page where we will ask for more information about your business, including:
- The name of your business
- Number of years your business has been trading
- Average monthly turnover
- The amount you are wanting to borrow
The next step involves disclosing your personal details, please be ready to tell us:
- Your title, first name and surname
- Your position in the business
- Your contact details
Carefully read through the terms and conditions, accept them and click ‘get my quote’. From here your application will be reviewed quickly by one of account managers.
Please expect a call and email from one of our dedicated account managers to discuss the terms of your loan agreement.
Carefully read through the terms of agreement and sign the relevant documentation ready to return to the lender. From there the funds will be available within 24 hours.