What is The Interest Rate on a Business Loan? Know Before You Apply (And Save Money)

Learn to get the best loan rate for your business and save on repayments.

Getting a business loan can be a game-changer for your company - but let’s be real: the interest rate can make or break the deal. 

A lower rate means more manageable monthly payments and more money staying in your business.

But what is the interest rate on a business loan, and how is it determined? 

Factors like your credit score, cash flow, loan type, and term length all play a role in what you’ll pay. 

Whether you’re looking to expand, invest in new equipment, or simply maintain cash flow, understanding these factors can help you secure the best possible rate.

In this guide, we’ll break down everything you need to know about business loan interest rates—from what drives them to how you can improve your chances of getting a better deal. Let’s make sure you’re fully prepared before you apply.

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What Determines the Interest Rate on Your Business Loan?

The interest rate on your business loan isn’t just a number—it’s a reflection of your financial health and risk level in the eyes of lenders. 

Whether you’re a startup looking for your first loan or an established business planning to expand, understanding the factors that influence your rate can help you secure better terms and save thousands over the life of your loan.

Here’s a breakdown of the key factors that affect your business loan’s interest rate—and actionable tips to optimize each one.

1. Business Credit Score

A higher credit score signals to lenders that you’re a responsible borrower, making it easier for you to access lower interest rates. It’s one of the first things lenders evaluate.

Credit Score Ranges:

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For instance, a business with an excellent credit score of 750 could access loan rates as low as 5%, while a business with a fair credit score of 650 may face higher rates closer to 9%.

Learn how to improve your business credit score.

2. Debt-to-Income (DTI) Ratio

Lenders use this ratio to evaluate your ability to take on more debt. A lower ratio suggests that you have enough income to cover existing and new debt, which can result in a lower interest rate.

How to Calculate Your DTI Ratio:

DTI Ratio = [ Total Debt Payments \ Total Income ] ×100

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A business generating £10,000 in monthly revenue with £2,000 in debt payments would have a DTI ratio of 20%, signaling to lenders that it’s a relatively low-risk borrower. This could help secure a more favorable rate.

3. Cash Flow and Profitability

Lenders prefer businesses that show consistent revenue, as it lowers the risk of missed payments. A strong track record of profitability reassures them that you can repay the loan without strain.

For example, a business with £50,000/month in stable, consistent revenue, even in challenging times, poses less risk to a lender than one with unpredictable cash flow. Demonstrating profitability over several months or years will significantly improve your ability to secure a loan at a lower rate.

4. Loan Amount

Larger loans often carry higher rates due to the increased risk for lenders, but this can vary. Some lenders may offer lower rates on larger amounts to attract big clients.

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Larger loans, such as one for £100,000, might carry a rate around 7%, whereas smaller loans like £10,000 could come with an interest rate closer to 10%, depending on other factors.

5. Loan Duration

The term of the loan impacts your monthly payment as well as the total interest paid over time. Shorter loans usually have lower rates, but come with higher monthly payments.

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A loan of £50,000 over 2 years might come with a rate of 6%, but the monthly payment will be higher compared to taking the same amount over 5 years, which could see a rate of 8% with more manageable payments.

6. Secured vs. Unsecured Loans

Secured loans, backed by collateral, offer lower interest rates because they’re less risky for lenders. Unsecured loans, which don’t require collateral, tend to have higher rates.

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A secured business mortgage, backed by real estate or equipment, might offer rates between 4-6%, whereas an unsecured loan, which doesn't require collateral, could range from 8-15%, reflecting the higher risk to the lender.

7. Industry Risk

Lenders assess the risk of your industry when determining rates. Higher-risk industries, such as restaurants or startups, may face higher rates compared to stable industries like manufacturing or IT.

A tech startup, facing unpredictable market conditions, is considered a higher-risk borrower than an established construction company, which benefits from steady demand and longer-term contracts.

8. Economic Conditions and Base Rates

Did you know that even global economic trends can impact your business loan’s interest rate? Factors like inflation and changes to the Bank of England’s base rate play a significant role in determining borrowing costs. 

For example, if the Bank of England raises its base rate by 0.5%, lenders often adjust their business loan rates accordingly—meaning you could end up paying more.

While you can’t control the economy, understanding these external factors can help you time your loan application strategically. For instance, applying during a period of stable or lower base rates could save you money in the long run.

Now that we’ve covered the broader factors, let’s dive deeper into what you can expect from the most common business loan options.

What is the average interest rate on a business loan?

When you start looking for a business loan, one of the first things you’ll notice is that there’s no set average interest rate. 

The rate you’re offered depends on various factors, including your credit score, the type of loan, and the lender’s policies. 

While it's tempting to focus solely on the interest rate, it’s crucial to understand how different types of loans can affect your overall financial situation. Let’s break it down:

Traditional Bank Loans

If you’ve ever approached a high street bank for a loan, you’ll know that their interest rates can vary significantly based on several factors. 

For unsecured loans, interest rates typically range from 6% to 15%, but the rate can be on the higher side if your business is relatively new or your credit isn’t stellar.

On the other hand, secured loans—such as commercial mortgages—tend to offer more attractive rates. You’ll likely see a range of 2% to 7% for these loans, since they’re backed by collateral, lowering the risk for the lender.

Now a well-established retail business with strong financials might secure an unsecured loan for £50,000 at an 8% interest rate over 3 years. 

In contrast, a newer business with a higher risk factor could face a rate as high as 15% for the same loan amount.

Government-Backed Loans

For startups, government-backed loans can be an attractive option. 

The Start Up Loan Scheme, for instance, provides a fixed interest rate of 6% per annum for loans up to £25,000, with repayment terms ranging from 1 to 5 years. 

This scheme is designed for UK-based businesses that have been trading for less than 24 months, giving new businesses a much-needed financial boost without the burden of high-interest rates.

However, it’s important to note that the Recovery Loan Scheme, a government initiative for businesses affected by the pandemic, was discontinued in 2024. So, while startup loans remain a great choice for new businesses, some government-backed options may no longer be available.

Alternative Financing

If a traditional bank loan doesn’t suit your needs, or if you need something more flexible, alternative financing options like invoice financing, merchant cash advances, and business overdrafts might be worth considering. 

These options often come with higher costs, but they offer quicker access to cash and more flexible repayment schedules.

Invoice Financing

With this type of financing, you can get an advance of 70-90% of your outstanding invoices. The fees typically range from 1.8% to 3% above the base rate, making it a more expensive option compared to traditional loans, but it’s ideal for businesses that need to improve cash flow quickly.

Merchant Cash Advances:

Rather than an interest rate, this loan type uses factor rates. 

You might borrow £10,000 with a factor rate of 1.3, meaning you would repay £13,000.

While the cost is higher, the flexibility of repayments based on your future sales can be a huge advantage for businesses with fluctuating revenue.

Business Overdrafts:

This is a great option if you need quick, short-term access to funds. 

A typical business overdraft comes with a representative EAR of around 13.87%, though unauthorized borrowing can jump to as high as 19.90%. 

While overdrafts can be a flexible tool, the cost can add up quickly, especially if you're constantly relying on it.

Revolving Credit Facilities:

This type of financing offers flexible terms, similar to an overdraft, but with lower daily interest rates (between 0.05% and 2%). 

You’ll only pay interest on the amount you’ve used, which makes it a more cost-effective option for businesses that need occasional access to extra funds.

• Please Note: Remember, these rates are indicative, and your actual offer may differ. 

Now that we’ve explored the key factors affecting your loan rate, let’s dive into the actionable steps you can take to secure better business loan rates. These strategies are designed to help you strengthen your application, compare options effectively, and negotiate better terms.

How to Secure Better Business Loan Rates

A lower interest rate doesn’t just mean smaller monthly payments—it can save your business thousands over the life of the loan. But how do you secure a better rate? It all comes down to presenting your business as a low-risk, financially stable borrower.

Here are proven strategies to strengthen your financial profile and improve your chances of securing a competitive rate:

1. Strengthen Your Financial Profile

Lenders want to see that your business is financially healthy before offering you a lower interest rate. 

Here’s how you can improve your financial standing and boost your appeal to lenders:

Action 1: Improve Your Credit Score

Your credit score is one of the first things lenders check. A higher score (670 or above) can unlock lower interest rates and better loan terms. Here’s how to boost your score:

• Pay bills on time to build a strong payment history.
• Reduce credit card balances to lower your credit utilization ratio.
• Correct any errors on your credit report to ensure accuracy.

If your credit score is on the lower side, consider securing a smaller loan now and repaying it on time. This demonstrates responsible borrowing behavior and can help you build a stronger credit profile, making it easier to secure larger financing in the future.

Action 2: Reduce Outstanding Debt

High debt levels can make lenders wary. Pay down existing debts to show that your business can manage its finances responsibly. This not only improves your creditworthiness but also frees up cash flow for future repayments.

Action 3: Manage Cash Flow Effectively

Consistent cash flow reassures lenders that you can make regular repayments. Use tools like cash flow forecasts and budgeting software to stay on top of your finances and demonstrate stability.

Quick Tip: If your credit score is in the ‘fair’ range (580-669), aim to push it into the ‘good’ range (670-739). Even a small improvement can open the door to better loan options and lower rates.

2. Prepare a Strong Loan Application

A well-prepared application is crucial. Here’s what you should include to stand out:

• Compelling Business Plan: Demonstrate your growth potential, and include revenue projections and a risk management strategy.
• Clear Objectives: If you’re seeking funding for expansion, show how this will directly lead to increased profits.
• Financial Statements: Include clear and accurate statements to build credibility.

If you seek £100,000 to scale your product line, show how this investment could increase revenue by 30% over the next two years.

3. Compare Multiple Lenders

It’s important to evaluate more than just the interest rate. Consider the following:

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Quick Tip: A loan with a slightly higher interest rate but lower fees might cost you less in the long run.

4. Understand Rate vs. Total Cost

It’s easy to get caught up in the interest rate, but the total cost of the loan is what really matters. Here's a quick breakdown:

• Interest Rate: This determines your regular payments.
• Upfront Fees: Fees charged before you receive the loan.
• Early Repayment Fees: Charges if you pay off the loan early.
• Ongoing Fees: Additional charges throughout the loan term.

Use loan calculators to get a clearer picture of your loan's total cost before committing.

5. Negotiate for Better Terms

Don’t settle for the first offer. You can negotiate better terms by:

• Leveraging competing offers: Present offers from different lenders and negotiate better terms.
• Requesting lower rates: If your financial profile has improved since your initial application, ask for a rate reduction.
• Building lender relationships: Cultivate a strong relationship with lenders for future opportunities.

6. Refinance Strategically

If market conditions improve or your financial position strengthens, consider refinancing your loan for better terms. This can help reduce your interest rate and lower monthly payments.

How FundOnion Can Help:

Compare multiple lenders to find the most competitive rates in just 90 seconds
Gain access to loan offers and discounts not available elsewhere.
Stay updated on the best loan rates to secure the most cost-effective option.
Understand upfront fees, repayment terms, and hidden charges before committing.

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Make Smart Decisions While Applying

Finding the right interest rate for your business loan isn’t just about the numbers—it’s about securing a deal that truly works for your business. We’ve covered how lenders set rates, what factors influence your loan terms, and how to position yourself for the best offers.

But here’s the thing: the lowest rate isn’t always the best deal. Watch out for hidden fees, unrealistic repayment terms, or lenders pushing you to make a quick decision. A loan that looks great on paper might end up costing you more in the long run if the terms don’t align with your cash flow. Always read the fine print and ensure the loan fits your business’s financial reality.

At FundOnion, we’re more than just a comparison tool—we’re your partner in finding the best financing solution for your business. Our expert brokers specialise in matching you with loans that offer the best rates, terms, and fees based on your unique situation.

Whether you’re looking to expand, manage cash flow, or invest in new opportunities, we’ll guide you every step of the way. Use our 90-second search tool to access competitive rates, exclusive offers, and lender insights—all in one place.

Ready to find the best financing for your business? Start your search with FundOnion today.

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FAQs

1. What is the current SBA loan rate?

In the UK, the equivalent to the U.S. Small Business Administration (SBA) loans is the government-backed Start Up Loans scheme, which offers a fixed interest rate of 6% per annum.

2. How much is the monthly payment for a $100 K business loan?

Assuming a loan amount of £80,000 (approximately $100,000), over a 5-year term at a 6% annual interest rate, the estimated monthly repayment would be around £1,544. This calculation is based on standard loan amortization formulas. 

For precise figures, it's advisable to use a business loan calculator or consult directly with the lender. 

3. What is a realistic business loan amount?

The amount a business can realistically borrow varies based on factors such as the company's financial health, credit history, and the lender's criteria. For startups, the UK government's Start Up Loans scheme offers loans ranging from £500 to £25,000. Established businesses with a solid financial track record may qualify for larger sums, potentially up to £10 million or more, depending on the lender and the business's financial standing.