The Average Business Loan Rates in 2022: What To Expect
Traditional lending institutions have been making it increasingly more difficult for businesses to get loans, which has recently propelled other sources of financing, such as merchant cash advances and business lines of credit, into the spotlight.
However, this financing source diversity makes it hard to predict the average loan rates for 2022.
In this article, we will break down everything you need to know about business loan rates and explain how they are affected by various factors. We’ll also provide tips on getting the best interest rate for your business.
Understanding How Rates Work
Although it might sometimes seem complicated, the way rates work is actually relatively simple. By definition, the interest rate is the percentage of the loan you’ll have to pay back on top of the principal.
For example, if you take out a $10,000 loan with a 10% interest rate, you’ll owe $11,000 in total. With fixed business loan interest rates, you’ll know exactly how much your monthly payments will be because they stay the same throughout the loan life cycle.
Another important element determining the financial burden shouldered by the borrower is the loan term, which is the length of time you have to repay the loan. A shorter-term loan will mean higher monthly payments, but you’ll pay less overall interest. A longer-term loan will mean lower monthly payments, but you’ll pay more interest overall.
Depending on the loan type, repayment terms can range from just a few months to a few years. That’s why it’s important to compare rates from multiple small-business lenders and check all loan options before taking out a loan.
Average Loan Rates by Loan Type
When considering interest rates on business loans, it’s important to remember that each type of business loan comes with a different interest rate.
The most common type of business lending disbursed in the U.S. are SBA loans, so named as they are guaranteed by the Small Business Administration (SBA). Alternatively, you can go for a traditional bank loan, online loan, invoice factoring, merchant cash advance, and more.
Here’s the breakdown of the average business loan rates by loan type for 2022:
|Loan Type||Average Annual Interest Rate|
|Traditional bank loan||2%-13%|
|Merchant cash advance||20%-250%|
If you're unsure about what type of loan is best for your business, it's always a good idea to speak with a financial advisor. They can help you compare rates and terms to find the best fit for your needs.
Factors Affecting Loan Rates
A number of factors affect the business loan rate. Here are a few of the most common:
Business Loan Type
Short-term loans typically have higher interest rates than long-term loans. Also, the interest rates on secured business loans, backed by collateral, are usually lower than those on unsecured loans.
One of the most significant factors that affect loan rates is the borrower's creditworthiness. Borrowers with solid credit scores usually qualify for lower interest rates as they are seen as less of a risk to lenders.
The annual turnover of a business can also affect the interest rate. Businesses with higher turnovers are usually seen as less risky and may get lower rates.
Another factor that affects a borrower's business loan interest rate is repayment history. If the business has a pattern of late or missed payments, it will likely be charged a higher interest rate. This is due to the fact that there is a higher risk of defaulting on the loan if the borrower has a history of financial trouble.
A borrower’s relationship with the lender is also a factor to consider. Borrowers who have been with a lender for a long time may be offered lower rates than new customers. Also, some lenders provide loyalty discounts to customers who renew their loans.
To wrap up, several factors can affect the average small-business loan interest rate and it’s essential to consider them all when shopping for a loan.
How to Check Your Business Credit
Checking your business’s credit is crucial in managing your finances and ensuring your business is on solid footing. There are a few ways to check your business credit, but you have to be thorough with each.
One way to check your business credit is to review your credit report from the major credit reporting agencies. You can obtain a free copy of your report from each agency once per year.
Another way to check your business credit is to use reliable business-credit monitoring services. These services will track your credit score and report any changes to you so that you can stay on top of your credit health.
Finally, as credit history has a significant effect on your average interest rate for a business loan, it's also a good idea to periodically check in with your creditors to ensure they are reporting accurate information about your payments and account balances. This will help you catch any errors early and avoid potential problems down the road.
Tips for Getting a Good Interest Rate
If you're in the market for a new loan, there are a few things you can do to ensure you get the best interest rate possible.
1. Start by checking with your local bank or credit union. They may be able to offer you a competitive rate, especially if you have a strong relationship.
2. Shop around online. Many lenders only do business online, and they often have better rates for small-business loans than banks with physical locations.
3. Consider a shorter loan term. The longer the term of your loan, the more interest you'll ultimately pay.
4. Don't be afraid to negotiate. If you're pre-approved for a loan at a certain interest rate, don't be scared to try to lower it. The worst that can happen is that the lender says no, but you might be surprised at how often it pays off to ask.
Common Fees To Watch
If you're considering getting a business loan, rates aren’t the only thing to think about. You should also be aware of any potential fees to avoid surprises down the road.
The first is the origination fee, which the lender charges for processing your loan application. When it comes to small-business fees, origination fees usually range from 1 to 6%.
Another common fee is the prepayment penalty, which is charged if you pay off your loan early. This fee can vary depending on the lender, but it typically goes from 1% to 5% of the prepayment amount.
Even if you calculate your business loan rate properly in the beginning, missing your repayment date will incur a late payment fee. This fee is usually 3% to 5% of the outstanding portion of the loan.
Finally, there's a closing fee, which is charged when you close on your loan. This fee varies between lenders, so we suggest you check that information before making any decisions about closing your account.
As you can see, there are a few fees to be aware of when taking out a business loan. Be sure to ask about all of them upfront so you know what to expect.
Various elements influence interest rates on a business loan. Understanding how these factors play a role in setting loan rates makes you better equipped to get the best possible rate for your business loan.
If you're looking to take out a business loan in 2022, it's essential to compare offers from multiple online lenders and pay attention to the fees associated with each. Understanding all of these factors will ensure you get the best business loan deal.
What Is a Good Interest Rate?
When it comes to interest rates, there is no magic number that is universally considered to be "good." Instead, the level of interest that is considered favorable depends on various factors, including the current market conditions and the individual’s financial goals.
Finding the best business loan rates will require some research and comparison. Of course, it is also important to consider the stability of the investment you’re financing with the loan when evaluating an interest rate.
How Do Banks Decide Interest Rates?
Banks use many factors to decide what interest rate to charge on loans, including the Federal Reserve’s overnight lending rate, the overall inflation level, and the borrower's creditworthiness.
The prime rate, which is the interest rate that banks charge their most creditworthy customers, is used as a benchmark for setting other commercial business loan rates. In general, when the prime rate goes up, so do other rates. However, banks may also offer promotional rates to attract new customers.
Who Sets Key Interest Rates?
In the United States, the benchmark interest rates are set by the Federal Open Market Committee (FOMC) of the Federal Reserve. The FOMC consists of the seven members of the Board of Governors of the Federal Reserve System and five Federal Reserve Bank presidents.
The president of the Federal Reserve Bank of New York is a permanent voting member, while the other presidents rotate through one-year terms as voting members.
What Causes Interest Rates to Fall?
The main factor that can lower interest rates is inflation. When inflation is low, businesses and consumers have less money to spend. This usually results in lower demand for loans, which leads to lower interest rates.
Other factors that can affect business loan rates include the Federal Reserve's monetary policy and the economy’s overall health. If the Fed lowers interest rates, banks usually follow suit and reduce their lending rates as well.
For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.
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