Average Small Business Loan Interest Rates in 2021: Comparing Top Lenders

Average Small Business Loan Interest Rates in 2021: Comparing Top Lenders

Compare Small Business Loans

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The average interest rate for a small business loan varies depending on your qualifications as a borrower, the type of loan you’re applying for and which lender you select. Loans from traditional lenders, such as banks or credit unions, can have annual percentage rates (APRs) ranging from 3% to 7%, while alternative or online loans can have APRs ranging from 7% to more than 100%.

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.

Average small business loan interest rates by lender

The average interest rate on a conventional small business loan is around 3% to 7%. That said, interest rates will vary across lenders, with banks typically offering lower rates than alternative or online lenders. Additionally, in 2020, banks offered their lowest fixed interest rates on business loans since 2017. Loans backed by the Small Business Administration (SBA) also offer competitive rates, even when compared to conventional bank loans.

Type of Lender
Average Annual Interest Rate (AIR)
AIR for SBA Loans
National and Regional Banks2.58%-7.16%6.24%
Foreign Banks (made by U.S. branches)1.45%-5.66%N/A
Online or Alternative Lenders13.00%-71.00%4.39%-7.01%
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The data on traditional lenders, obtained from the Federal Reserve, were taken for commercial and industrial loans and serve as comparison points when shopping for loans. The rates presented above are effective annual interest rates that factor in compounding annual interest from the stated interest rate, the length of the term and the loan amount.

Unlike an APR, the effective annual interest rate does not include any closing, origination or other fees, which will increase the cost of the loan. These data points track all types of commercial and industrial loans, so these rates may be lower than what you would receive on a loan.

Alternative business lenders

When compared to banks, online and alternative lenders have higher interest rates, because they have fewer eligibility requirements and faster underwriting processes. For example, some alternative lenders may only require six months in business and a stated annual revenue of $100,000 to qualify for a loan. These lenders may also return a credit decision within a few hours.

Due to the reduced eligibility criteria, online lenders are generally a better option for businesses or borrowers that are unbankable—such as startups, low revenue businesses or applicants with lower credit scores. In the table below, we compare APRs of online business loans from alternative lenders.

Lender
Annual Percentage Rates (APRs)
American Express (business loan)6.98% - 19.97%
American Express (merchant financing)11.50% - 25.90%
Balboa Capital3.00% - 30.00%
BlueVine (business loan)15.00% - 78.00%
BlueVine (invoice financing)15.00% - 68.00%
BlueVine (line of credit)15.00% - 78.00%
Big Think Capital7% - 30%
Credibility Capital8.00% - 25.00%
Credibly9.99% - 36.00%
Currency8.00% - 36.00%
Fundbox (line of credit)15.00% - 59.00%
Funding Circle4.99%-22.99%
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Average small business loan interest rates by loan product

The type of loan you apply for will affect your interest rate. Some alternative products—merchant cash advances or invoice factoring, etc.—will have higher APRs than traditional options, such as bank or SBA loans. We recommend borrowers consider conventional financing options before turning to alternative products. In the table below, we compare APRs for various types of loan products from data we gathered directly from lenders.

Type of Loan Product
Average APRs
Bank Loans2.58%-7.16%
SBA 7(a) Loans5.5%-11.25%
Online Term Loans7.00%-99.70%
Lines of Credit2.58%-80.00%
Merchant Cash Advances20.00%-250.00%
Invoice Factoring13.00%-60.00%
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Alternative lenders offer a wider variety of loan products than banks. Most banks will offer term loans and lines of credit, but many alternative lenders offer these products in addition to specialty financing—such as accounts receivable financing, merchant cash advances or invoice factoring. Alternative financing products will generally carry higher interest rates than regular term loans and lines of credit.

Given the high rates charged by alternative lenders for certain products, we'd recommend only applying for them as a last resort. If the rates of your business financing are too high, it'll be extremely difficult to incur a net positive from your small-business loan.

Other factors that affect your small business loan interest rate

Credit profile. Most small-business lenders will evaluate both your personal and business credit score during the loan application process. Lenders want to see that you can repay your other personal or business debt obligations on time.

Most lenders require minimum credit scores to qualify for their loan products. These can vary greatly, as banks sometimes require FICO credit scores of 680 and above, while some alternative lenders accept scores as low as 500. Your credit score will be a determinant in what interest rate you receive, with higher scores generally translating to lower interest rates.

Business financials. Lenders will also consider your current and projected business finances as part of the application process. Most lenders make requirements regarding your time in business and the minimum amount of annual revenue your business must generate. While specific requirements for cash flow or profitability are less common, you should be prepared to show relevant documentation if asked. You'll need to demonstrate how you plan to use the loan proceeds and how the funds would benefit the business in the long run. This should be carefully outlined in your business plan and strategy.

Lender relationship. Another factor that affects your interest rate is your relationship with the lender. Some lenders may offer lower interest rates or reduced fees to applicants who have a deposit account with the institution or have taken out loans in the past. This is true for both banks and alternative lenders, so it may be a smart idea to do all of your borrowing and banking in one place.

Types of Fees

APRs include the interest that needs to be repaid as well as any applicable fees. Business financing usually comes with a number of fees that can inflate the overall APR. Be wary as you don't want to be misled in underestimating the true cost of a loan if interest rates are low but all other fees are high.

Here are some common fees to keep an eye out for:

Fee Type
Description
Application FeeNonrefundable
Origination FeeCovers the labor in processing loan
Prepayment PenaltyFor borrowers who pay off loans early
Late Payment FeesFor borrowers who miss predefined payments
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What does it take to qualify?

Banks qualify borrowers based on personal and business credit scores, annual revenue, profitability, and more. Due to their high standards for approval, many business owners may not consider this traditional form of business financing.

Online lenders instead offer much more lenient eligibility requirements. In exchange, they'll likely charge much higher rates to make up for the increased risk they incur by lending to "riskier" businesses. Keep in mind that even if you do meet the minimum requirements set forth by a lender, your rates and terms will still vary depending on the strength of your application.

Here's a quick comparison of typical eligibility requirements for both traditional and alternative lenders. Exact requirements will vary by lender.

Traditional Lender
Alternative Lender
Personal credit score680+600+
Annual revenue$250,000+$100,000+
ProfitabilityRequiredNot required
Age of business2+ years6 months to 1+ years
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Sources

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.