Your Complete Guide to Business Loans and the Outlook for Interest Rates in 2020

This guide will provide you with answers to some of the important questions you may be asking regarding small business loans and their corresponding interest rates.

The ability of small businesses to access affordable financing continues to be one the most pressing policy concerns of the US federal government. That is essentially as a result of the well-documented role that small businesses play in creating jobs and contributing to economic growth, both of which are vital to a sound economy. Naturally, small business owners must be able to obtain efficient financing in order to give their businesses the opportunity to grow during periods of relative economic normalcy. While it is important under normal circumstances, the situation becomes exponentially more critical if a small business is to survive an economic downturn such as the one the US is experiencing as a result of the Covid-19 pandemic.

In the absence of adequate financing, small businesses will not be able to continue their critical contributions to economic growth and employment. In fact, under the current economic conditions, those small businesses will not only fail to contribute to growth, but will have a negative impact as a result of closures and employee layoffs.

Having said that, it is important to understand that the outlook for business loan interest rates are difficult to accurately gauge at any given point in time. That is because lending institutions, both mainstream and alternative lenders, employ different methodologies to compute the interest rate that will be applicable to a particular loan product. As such, it is difficult to provide an average interest rate, though a range will be a better gauge for many potential borrowers.

Fund your business with loans guaranteed by the Small Business Administration (SBA)

Every small business owner knows (or should know) about the Small Business Administration. The SBA works with lenders to provide generally low-cost loans to small businesses which meet their stringent requirements. The SBA is not the lender of record, so it does not lend money directly to the small business owner.

What the SBA does is establishes guidelines (including applicable business loan interest rates) for small business loans made by its partnering lenders. Many of the largest US national banks have partnered with the SBA, but larger regional banks are also supported. The list of approved SBA lenders has grown to include a number of online alternative lenders and micro-lending institutions; a search feature on the SBA website can help you locate a micro-lender within a particular area.

The benefit to the lenders is that the SBA reduces their risk of a loan default while at the same time, it benefits small business owners by making it easier for them to access much-needed capital. Below is a list of just a few of the larger and more well-known US-based banks and lenders that have actively partnered with the SBA and which have the most approved SBA loans.

  • Wells Fargo
  • Huntington Bank
  • JP Morgan Chase
  • TD Bank
  • S. Bank
  • Bank of America

These lenders offer both SBA and non-SBA loans. A small business owner should be aware that the non-SBA small business loans typically have stricter eligibility requirements. For example, they may require that the small business be well established for a specific number of years and have income or revenue which needs to meet a certain threshold. While the SBA’s own loan parameters are stringent, because with a non-SBA loan the lender assumes all the risk, their own guidelines might be that much more difficult to achieve.

While the average small business loan interest rate on an SBA-backed loan will be considerably less than the average interest rate of an alternative lender, a business owner must weigh the pros and cons, all things considered. For example, one important thing that all small business owners should be aware of is the turnaround time for an SBA loan, and even a conventional loan which is not backed by the SBA. The process of getting an SBA loan approval could take as many as 12 weeks, but is generally no fewer than 8 weeks. A conventional loan may also take a few weeks for the process through to funding. If a small business owner’s needs are more urgent than that, an alternative funding source might be an option.

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Business Loan Interest Rates Now and Their Outlook

Given the economic situation in the world, in general, and the US, in particular, during the second quarter of 2020, one might wonder where business loan interest rates are now and where they are headed. As of this writing, the Federal Reserve Bank has established its Fed Funds rate at 0.25%. The Fed Funds rate is the rate at which the US central bank lends money to US banks. There is some speculation that the Fed, as it is familiarly known, could move to a negative interest rate environment as many of its global peers are now doing. The thinking is that this could help to encourage economic growth in the US economy which is struggling mightily as a result of the fallout from the Coronavirus.

Let’s take a look at some of the key loan facilities that are available to small business owners from the SBA.

The SBA 7(a) loan program provides US-based eligible small businesses with loans up to $5 million through the SBA’s lending partners. The loan proceeds may be used for a variety of purposes; they include (but are not limited to) working capital purposes, expansion, renovation or even new construction, land or building purchase, purchase of fixtures and/or equipment, etc. A complete list of uses as well as restrictions can be found on the SBA website.

The SBA’s Express Loan program provides small businesses with loans of up to $350,000 for a maximum term of seven years; a line of credit option is also available. The turnaround time for approval or denial is typically  36 hours (though it may now be longer given the current situation). The uses of the loan proceeds are similar to the SBA’s 7(a).

The SBA’s Microloan program provides loans of up to $50,000 (with an average of $14,000) to small businesses through various non-profit lending organizations specifically intended for markets that have typically been underserved by traditional lenders. The use of the loan proceeds may for working capital, machinery and equipment purchases, as well as supplies and fixtures.

Below is a sampling of current SBA loan facilities and the corresponding SBA loan interest rate range and average interest rates. Note that the Paycheck Protection loan and the Economic Injury Disaster Loan are only intended as temporary relief because these loans are meant to assist business owners during the Coronavirus pandemic.

SBA Loan Type

Interest Rate Range

Average Interest Rate

SBA Pay Check Protection Loan Rates

1.00%

1.00%

SBA Economic Injury Disaster Loan Rates

2.75% to 3.75%

3.25%

SBA 7(a) Loan Rates

7.25% to 9.75%

8.50%

SBA Express Loan Rates

9.50% to 11.50%

10.50%

SBA Microloan Rates

6.5% to 13%

9.75%

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SBA Loans, Typical Loan Terms

The terms of an SBA loan will largely depend on the type of loan facility that is approved.

  • Paycheck Protection Loan up to 2 years
  • Economic Injury Disaster Loan up to 30 years
  • Express Loan up to 7 years
  • Microloan up to 6 years

Applying for a government-backed SBA loan increases the likelihood that the small business owner will be approved for a small business loan with a traditional bank. SBA loans have fairly standard (and often stringent) eligibility requirements and associated fees, and they do place limits on the loan and APR. That makes it somewhat difficult to compare which bank is a better choice, based solely on their SBA offerings. What is more important is to compare potential SBA lenders based on their likelihood of approving your application; the fact is in some cases, your ability to meet SBA requirements is not a guarantee that your loan request will be approved by one particular lender or that you will be offered the small business loan interest rate that you had hoped for.

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Conventional Business Loans

Small business owners often require loans for employing additional staff, to purchase property or update facilities, or even just to get the company off of the ground. The most common ways for entrepreneurs to gain access to necessary capital is to approach a bank. That need may leave you wondering about your options. What are the different types of loans? And what are the typical terms for small business loans? Will a guaranty be required?

The requirements for a traditional or conventional business loan are often very stringent. It is in your best interests to be well prepared before you submit an application for a small business loan. The typical terms for a small business loan will vary broadly; they generally will be specific to your needs but will also incorporate the requirements of the lender (or type of lender) you ultimately choose. For example, you may have limitations on the amount or use of the proceeds, and the type of loan may be limited, as well as the repayment schedule. Some lenders may require collateral while others will not, and some will ask for a guaranty while others may not need it.

Regardless of the terms, there are some things you should be aware of before you apply for a small business loan. Currently, the average interest rate range for a conventional small business loan is between 4% and 6%. Of course, as mentioned previously, the average interest rate, and rates in general, will vary across lenders and will be dependent upon a variety of factors. That said, traditional banks and lenders will typically offer a lower average interest rate than alternative lenders. Of course, loans which are backed by the Small Business Administration are generally even more competitive when compared to conventional bank loans. If you meet the criteria for an SBA-backed loan, it’s still a good idea to shop around for the best interest rate.

Type of Loan Product

Interest Rate Range

Major national banks

From 2.55% to 5.14%

Smaller national banks and regional banks

From 2.48% to 5.40%

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Alternative and Online Lenders

Of course, not every small business owner will meet the requirements set out by the Small Business Administration. Unfortunately, even more won’t meet the requirements of a conventional or non-SBA loan, simply because the banks are taking on all of the risk. When that happens, many small business owners will need to look elsewhere to meet their financing needs.

When compared to conventional lenders, online and alternative lenders generally offer business loans at what can be significantly higher interest rates. Their requirements for approval of a business loan are not as strict as that of a conventional or traditional lender. The trade off to the higher interest rate though is that the proceeds of the loan are usually disbursed very quickly, sometimes in as little as a day, because a decision on a small business loan can be made within a couple of hours, in some cases.

Because of the lower eligibility criteria, online lenders are, in general, a better option for a small business owner that might be considered “unbankable” to a traditional lender. An “unbankable” borrower might be a small business owner which has only recently begun operations, i.e., a startup, or one that has low or seasonal revenue. In some cases, the business owner might have a credit score that is below the standard required by a mainstream lender.

In the table which follows, you can see some of the small business loan interest rates that are currently being charged for a small business loan or line of credit by online or alternative lenders. Those APRs range from a low of 6.50% (Guidant Financial’s SBA loan) to a mind-numbing 99.70% (from alternative lender, OnDeck).

Lender

Annual Percentage Rates (APRs)

American Express (business loan)

6.98% – 19.97%

American Express (merchant financing)

11.50% – 25.90%

BlueVine (invoice financing)

15.00% – 68.00%

BlueVine (line of credit)

15.00% – 78.00%

Credibly

9.99% – 36.00%

Foundation

7.99% – 29.99%

Fundbox (invoice financing)

13.00% – 60.00%

Fundbox (line of credit)

15.00% – 59.00%

Guidant Financial (SBA loan)

6.50%

Kabbage (line of credit)

20.00% – 80.00%

LendingClub

5.99 – 29.99%

OnDeck

9.30% – 99.70%

PayPal Working Capital

15.00% – 30.00%

SmartBiz (SBA loan)

Prime Rate + 1.50% – 2.75%

SnapCap

19.99% – 49.99%

 

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Main Factors that Determine Small Business Loan Interest Rate 

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The Importance of the Credit Score

While a good credit score may be less important for an alternative lender, the fact is the better your personal credit score the more likely you are to get approved for a loan from any lender. Moreover, with a good credit score you may be in a good position to negotiate for a better interest rate, as well as better loan terms. To that end, it is important that you be aware of your credit score before you shop for financing. If your company has been is business long enough, you may also find that your company has a credit history and a corresponding credit score. If your lender says that they will be running a D&B on your company (short for Dun & Bradstreet), that will provide them with a broader picture of your company’s creditworthiness. As a business owner, you should closely monitor both your personal credit and your business’ credit score.

In addition to having a good credit score, many lenders take into account your credit utilization ratio. This gives lenders a better idea of how well your business uses and repays the funds that they have made available to you. The credit utilization ratio gives your potential lender a good indication as to how efficiently and effectively you are using your credit limits.

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Your Small Business’ Cash Flow

Cash flow is another metric that lenders use to gauge your credit worthiness. A lender is better able to assess your ability to repay the requested loan from your cash flow, both inputs and outlays. To that end, your accountant or CPA can help you gather all of the relevant documents, which will typically include several years worth of federal income tax and financial statements (if available) and, in some cases, a pro forma statement.

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Collateral

Traditional lenders will always prefer to have collateral to secure a loan, and they will often “compensate” you with better terms or interest rates. That’s not to suggest that an unsecured loan isn’t also an option, as many major lenders offer unsecured long-term loans at competitive rates. However, you should be prepared to provide collateral if your lender requires it. Equipment, fixtures, vehicles, real estate and inventory are just a few examples of assets that many business owners can use as collateral. The caveat, of course, is that if you default on the loan, the lender has the legal right to seize and liquidate the asset you staked as security in order to get their money back.

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Loan Terms

Conventional business loan terms can vary widely. The length of time a business owner will have to repay a loan will depend on a number of factors, including the use of the funds, the type of business you operate, and your credit score.

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Guaranty, Application and Other Fees

You should be aware that the SBA does charge a guaranty fee for certain loan facilities that they offer. Moreover, most lenders, conventional as well as alternative, may assess a number of fees, many of which require payment prior to the loan disbursement. At a minimum, you may need to pay for an application fee (often non-refundable), documentation fee, processing fees, costs for security filings, title or lien searches, etc.

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Conclusion

While in the past many small business owners may have asked which bank would offer the lowest interest rate for their small business loan, that question may now be without merit. By that I mean, that is the right question to ask only if a low interest rate is the primary consideration when you want to borrow funds for your small business. If time is of the essence, however and, given the current distressing economic situation, that may very well be the case, then the lowest interest rate may not be that important. Or what if you are without collateral, which is often a factor of a low interest rate? In that case, a bank loan might not be the answer. Regardless, the issue of the lowest interest rate may be negligible given the experts’ outlook for interest rates. What is most important now is to get your loan approved and funded so that you can keep your small business, and the staff and vendors which support it, in operation.

The table below shows the types of lenders and their average annual interest rates for 2020 (assuming that your small business has a good credit score):

Type of Lender

Average Annual Interest Rate

Large National Banks

2.55% – 5.14%

Small National and Regional Banks

3.23% – 5.40%

Foreign Banks (made by U.S. branches)

1.50% – 5.45%

Online or Alternative Lenders

5.49% – 66.57%

If you noted the available charts for the average interest rate, it should become clear that a small business owner can find a more competitive small business loan interest rate from an SBA-backed loan. The problem, of course, is that not every small business owner will meet all of the SBA requirements. Moreover, in the dire current economic predicament that we all find ourselves in, time is of the essence. If you don’t have the luxury of waiting for a conventional loan, an alternative lender will likely be your best choice. Having said that, your average interest rate will more likely be higher from an alternative lender; it’s the trade off for a quicker turnaround, after all.

Other common loans include a line of credit, which gives the borrower access to a certain amount of funds at any given time and invoice factoring, in which invoices are sold for a lump sum of cash to improve cash flow and reduce debt. Regardless where your funding comes from, whether it is a conventional lender or a non-traditional one, the small business loan rate that you are ultimately offered will be dependent on several factors, as previously enumerated. The question you need to ask yourself, as a small business owner in the midst of an economic crisis, is can you and your small business afford to wait much longer?

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FAQ

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1. What Is an Interest Rate?

Every loan is composed out of 2 elements – the principle figure and rate of interest. The interest rate is the amount a lender charges for lending the money and is expressed as a percentage of the principle. The interest rate is typically for a one year term, and is known as Annual Percentage Rate (APR). A loan that is considered low risk by the lender will have a lower interest rate.

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2. How Lenders Determine Your Small Business Interest Rate?

Before you apply to the lender, put together a professional business plan concerning why you need the small business loan. Here are a few of the determining factors that go into determining your small business interest rate:

  • Type of loan/funding
  • Time in business
  • Your credit score
  • Payment history
  • Term of the loan
  • Collateral
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3. What is a Good Interest Rate For a Small Business Loan?

Small business loan interest rate will depend on your credit history, credit score, and overall creditworthiness. Good interest rate varies from one small business to another, thus what may consider good for one small business might not be good for another business.

 

 

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