Since there are different types of small business loans there is not just one average interest rate, there is a range of rates. Interest rates vary depending upon the type of small business loan, installment or business lines of credit. Taking into account variances due to region, industry and credit ratings here are the average rates for small business loans in America:
- Installment Business Loan – APR 5-9%, lower interest rates are for larger total loan amounts. SBA Small Business Administration loans range from 3.83% – 4.56%. The bank lender cannot charge more than the prime interest rate plus 2.25% for a loan due and payable in less than seven years.
- Business Line of Credit – APR prime plus 1.75-9.75% on credit limits from $10,000 – $100,000 depending on the borrower’s credit history and score. Lower lines of credits from $5,000 – $50,000 interest rates range from Prime + 1.75 – 6.50%
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Read my Kabbage review for small business lines of credit for working capital to grow your business
Types of Small Business Loans & How They Work
- Installment Business Loan Installment – Similar to car loans and other types of personal loans. You borrow a set amount of money and pay monthly payments until you have repaid the loan principal amount, interest and bank fees. When the balance due is zero you have completed the loan and it is closed.
- Business Line of Credit – Is more like a credit card where your lender sets a limit of your credit and you borrow, or draw funds, from it as needed for working capital for your business. Monthly you pay back as you are able. When the balance is zero the line of credit does not close it remains open for you to borrow from again in the future as needed to keep cash flowing in your business.
You can see that these are different types of banking relationships. Since traditionally installment loans are more secure for lenders the interest rates are lower than business lines of credit.
Comparing the interest rates on installment business loans and lines of credit are not accurate. Business lines of credit are more flexible and are ongoing access to capital thus they cost more in interest rates and fees.
I recommend Kabbage business lines of credits for quick cash infusions into your business at reasonable interest rates.
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Beware of Hidden Loan Fees
You are a smart business owner who is shopping for small business credit wisely. You are asking the right questions: How much is the total cost of this small business loan? Is that a fair amount and within the range of average interest rates?
Beware of hidden fees that some predatory lenders use to make their loans almost impossible to completely pay off. Additional fees can radically change the value of a low-interest rate loan into one that is impossibly high.
Fees to watch out for and clarify before you accept a business loan are:
- Setup fees – $100 +
- Processing fees – $10-$25 per month
- Origination Fee – Percentage of the total principal you are borrowing
- Application Fee – Costs for processing your application and appraising your property to be used as collateral
- Guarantee Fee – SBA loans guarantees loans that banks lend businesses. Some lenders pass on the expense to borrowers
- Late Payment Fee – For payments made after the due date
- Check Processing Fee – If you pay by check, instead of direct debit from your checking account, some banks charge a fee to process your check payment
- Underwriting Fee – The lender uses this fee to pay the underwriter who evaluated your business financials
- Prepayment Penalty – If you pay your loan off too early some banks charge you a penalty
