Interest Rates

The interest rate is one of the most important ways to decide which business loan is right for you, and how much your loan costs

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The interest rate you will pay on your business loan will vary depending on the profile of your business. There are many variables of risk that the lender will consider — and generally speaking the higher the risk, the more you’ll end up paying.

Important factors

The best indicator of the rate you'll pay is your credit rating. A poor credit history can negatively impact your application for a business loan, potentially resulting in a much higher interest rate.

However, the lender's risk is also determined by a variety of other factors, including:

  • the term length of the loan
  • any security that may be used
  • how well established the business is
  • trading history

The interest rates you may see advertised can have a range of hidden costs, so what may look like a great deal in fact includes fees to end the agreement early or arrange the loan itself.

Standard interest rates

Secured

Credit profile Up to 1 year 1-2 years 2-4 years
Good 8% 8% 5%
Average 15% 15% 9%
Poor 24% 24% 15%

Unsecured

Credit profile Up to 1 year 1-2 years 2-4 years
Good From 5% 8% 9%
Average 12% 15% 15%
Poor 28% 24% 21%

Risk

Most lenders won’t offer an unsecured loan for longer than a 24 month term for businesses with recent credit problems such as satisfied CCJs or missed payments.

It is also important to note that interest rates are for demonstrative purposes only and do not include fees that may be added on to the total cost of the loan as a whole.

It's worth remembering that for loans less than one year, you wouldn’t end up paying a full year’s interest, and therefore an APR figure isn't particularly helpful. On the other hand, for a longer loan, the effect of compounding would be higher. For example, 21% per year over 48 months has a larger expense than a 28% per year loan over just 12 months.

It is also important to realize rates can be prohibitively expensive for businesses with poor credit because of the inherent risk involved in lending to them. However, since businesses tend to improve their credit over time, they could qualify for much lower rates down the line. Being offered a line of credit when you thought you would not be offered one might be tempting, but the rate could be prohibitive and it may not be the correct time to take on the burden.

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