If you need cash to grow your business, cover everyday business expenses, or buy equipment, you might be in the market for a business loan. Comparing offers is the best way to find a good deal on your financing—but if you just look at interest rates, you might not make an accurate comparison.
Interest rates show you the cost of borrowing money, while annual percentage rates (APRs) show what you’re really paying because they include additional fees that may apply to your loan. Both terms represent the costs you’ll pay. But the APR reflects the true cost of borrowing money.
What is an interest rate?
Interest is the cost of borrowing money when you take out a loan or another type of financing. Lenders usually express this cost as an interest rate, which is a percentage of the amount borrowed. Generally, a higher interest rate means you pay more interest over the life of the loan.
The amount you pay in interest also depends on how the lender calculates it:
- Simple interest: The interest is calculated using the principal only.
- Compound interest: Interest accumulates on the principal along with the interest that was accrued during the previous compounding period.
Most business term loans come with compound interest, which costs more over time compared to simple interest.
Interest rate example
Let’s say you borrow $10,000 with a two-year term and 8% interest rate. You can plug these numbers into a loan calculator to find out how much interest you’d pay over the life of the loan. In this case, you pay $854.55 in interest.
What is an APR?
An annual percentage rate, or APR, includes a loan’s interest rate plus any additional fees a lender charges. For instance, a business term loan’s APR may include the interest rate and an origination fee.
The APR is designed to measure your overall costs of the loan. With the interest rate and fees bundled in one number, you can compare multiple loan offers and see which one is the best deal for you. The APR is usually higher than the interest rate because the APR takes into account more than just interest.
The Federal Truth in Lending Act (TILA) requires lenders to provide an APR when writing consumer loan agreements. But because this law doesn’t apply to commercial lending, your lender may not provide you with an APR when you take out a business loan, line of credit, or credit card.
Many commercial lenders still advertise APRs to help you make an apples-to-apples comparison when you get quotes. If you’re applying for a business loan and don’t see an APR, ask the lender to provide one.
Note: Your monthly loan payments aren’t based on your APR. Rather, payments are based on the interest rate on your promissory note.
APR example
Let’s say you’re comparing offers on business loans, but they all come with different interest rates and fees. If the lender hasn’t provided the APR, you can use an APR calculator to better compare the offers. The table below shows three loans with different rates and fees. In this example, the loan with the highest interest rate is the best offer because it costs less overall. The APR can show you that at a glance.
| Loan amount | Loan term | Interest rate | Origination fee | APR | Total costs | |
| Loan A | $10,000 | 2 years | 8% | $500 | 12.89% | $1,354.55 |
| Loan B | $10,000 | 2 years | 7% | $700 | 13.77% | $1,445.42 |
| Loan C | $10,000 | 2 years | 9% | $200 | 10.98% | $1,164.34 |
How are interest rates determined?
Several factors influence business loan interest rates, including:
- Creditworthiness: A higher credit score signals you’ve repaid debt on time and as agreed, which reduces a lender’s risk. This can help you qualify for a better interest rate. Lenders may check your business credit score and your personal credit.
- Time in business: Newer businesses—younger than one or two years—are generally more likely to fail, so lenders take on more risk when providing loans to these companies. To make up for that risk, lenders may increase the borrower’s interest rate.
- Industry: Some industries, such as restaurants, pose more risk to lenders. This could make it difficult to qualify for a loan or get a low interest rate.
- Annual revenue: A higher annual revenue indicates you can make your monthly loan payments on time while meeting your other financial obligations.
- Loan term: Loans with longer terms typically have higher interest rates, while shorter terms come with lower rates.
- Type of loan: Business owners have many different financing options, including term loans, lines of credit, merchant cash advances, invoice factoring, SBA loans, and more. Average rates vary with each option.
- Collateral: If you put up collateral, such as business equipment or a savings account, you may qualify for a better interest rate.
How to get a good interest rate
The average small-business bank loan ranged from 6.14% to 12.47% in the first quarter of 2024, according to the Federal Reserve Bank of Kansas City. The best rates go to well-qualified business owners with good credit, strong revenue, and enough time in business. If you’re looking at business loans and want to save money, here are some ways to score a good interest rate.
- Build or improve credit: A boost to your business credit score and personal credit can help you get a better interest rate.
- Be an established business: You may need to show you’ve been in business for at least six months to qualify for a loan. Startups may need to consider alternative forms of financing, such as a business credit card, until they’ve built up more time in business.
- Increase monthly revenue: Lenders typically prefer you have a minimum annual revenue of $100,000 to $250,000. Consider taking steps to grow your business or otherwise increase profitability to reach this threshold.
- Provide collateral (if necessary): Secured business loans, which require you to pledge collateral, sometimes come with lower interest rates because there’s less risk for the lender.
- Shop around: Comparing quotes from several lenders is the best way to check offers and find the best deal. You can even use the best offer to negotiate a lower rate with another lender.
If you can’t find a loan with an affordable rate or you’ve been turned down by several lenders, consider checking out Small Business Administration (SBA) loans. With low interest rates, long repayment terms, and flexible lending criteria, SBA loans are one of the best funding options for business owners. To qualify, you may need to show you have no alternative financial resources available.
Frequently Asked Questions:
Where and when should a business owner expect to see the terms APR and interest rate?
You may see the terms “APR” and “interest rate” when checking a lender’s website and when you get a rate quote to compare offers. If you move forward with getting the loan, you’ll also see these terms listed on your disclosure and the loan contract that you sign. But because lenders aren’t required by law to include the APR on commercial loan documents, you might not find the APR when you look for it.
Which tends to be more accurate: interest rate or APR?
An APR gives you a better idea of the cost of a loan because it includes the interest rate plus any fees that apply, such as origination fees.
What’s a good APR? What’s a good interest rate?
There’s no one single definition of a good APR or interest rate because they can change every day and are influenced by economic trends. But generally, a good interest rate or APR is one that’s lower than the average rate in the marketplace.
