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Written by Live Oak Bank
With Live Oak, you get a partner who believes in your success, and is willing to take the journey alongside you. We provide small business loans tailored to your goals.
When acquiring business loans, the APR (Annual Percentage Rate) plays a critical role in shaping your loan. It directly impacts your business’s long-term financial planning, the total cost of borrowing, monthly cash flow and overall loan flexibility. Without a clear understanding of business loan interest rates, you are at risk of higher monthly payments and tighter cash flow.
Interest rates for business loans are not one-size-fits-all. There are many factors that can affect your loan’s interest rate. Some of these factors include:
Lenders evaluate a business’s risk profile to understand its internal and operational vulnerabilities. If there is a higher risk due to things like inconsistent cash flow or limited collateral, there is likely going to be a higher interest rate to help mitigate that risk.
Similarly, they also assess creditworthiness. This includes both the business’s credit history and the owner’s credit history. A strong credit history shows reliability to pay back debt and can lead to lower rates. Weak credit history shows signs of risk and may increase the cost of borrowing.
Shorter loan terms (the amount of time you will be paying off the loan), tend to come with lower interest rates since the bank is at risk for a shorter period. It is important to note that although your interest rate may be lower, your monthly payments will be much higher due to the shorter amount of time you have to pay off the loan, which will affect your cash flow.
Interest rates for business loans come in two different structures: fixed vs. variable. Fixed rates stay the same throughout the loan term, offering predictability for your business and payments. Variable rates fluctuate with market conditions – as the prime rates increase, so does the interest rate on your loan and vice versa when we are in a falling rate environment.
Amortization refers to how a loan is paid off over time – the most common amortization schedule is monthly payments. More frequent payments usually offer lower interest rates, while less frequent payments will offer higher interest rates.
The interest rate on your business loan isn’t just decided by your lender. Market conditions and the prime rate heavily influence your borrowing costs. The prime rate is a baseline rate that is tied to the federal funds rate, which is set by the Federal Reserve. When the Fed raises or lowers the federal funds rate, banks adjust their prime rate accordingly, which affects your interest rate.
Beyond factors like creditworthiness, risk profile and economic conditions, the type of loan you choose plays a critical role in determining the overall cost of borrowing. Different loan structures carry unique pricing implications that can significantly impact your interest rate and financial strategy.
Business loans come in many forms - each of these carries its own typical interest rate range.
| Loan Type | Typical Interest Rate | Flexibility | Fees | Best Used For | Trade-Off Considerations |
| SBA Loans | 5%-10% (government backed) | Moderate flexibility, longer terms | Guarantee fees, closing costs | Small businesses seeking affordable financing | Strict eligibility requirements |
| Live Oak Express | 9.5%-12.5% on average | Faster loan process, less stringent collateral requirements | Guarantee fees, closing costs (lighter than larger SBA loans) | Quick access to cash for working capital, refinance, etc. | Loans only go up to $350,000 |
| Term Loan | 6-12% | Fixed repayment schedule | Origination fees, possible repayment penalties | Large, one-time investments | Predictable payments but less flexibility |
| Line of Credit | 7%-18% (variable) | Highly flexible, borrow as needed | Annual fees, draw fees | Managing cash flow, covering short-term expenses | Rates can fluctuate |
Your interest rate, terms and speed to receive funds differ based on your creditworthiness, industry and other factors.
While your interest rate is undoubtedly important, your loan term often may have a far more substantial and immediate impact on your monthly payments. Comparing loan scenarios based on both interest rates and loan terms is essential to minimizing loan costs and managing cash flow efficiently.
Even though a loan with a lower interest rate may look cheaper at first glance, higher fees can make it more expensive overall. For instance, a $100,000 loan at 6% interest with a 4% origination fee ends up costing about $20,000 over five years. Meanwhile, a similar loan at 7% interest but only a 1% origination fee costs closer to $19,800. This shows that the “headline rate” isn’t the whole story. Fees and structure can tip the balance on total cost.
Variable rates tend to outperform fixed rates when interest rates continue to be stable or fall, or when borrowing is short-term enough that the rate is less likely to fluctuate.
Fixed rates are generally better when stability and predictability matter most to you during the life of your loan. This locks in the interest rate for the entire loan term, protecting you from market fluctuations.
Collateral, draw restrictions and prepayment penalties can all change the real cost and flexibility of a loan. For example, a secured loan might require equipment as collateral, while an unsecured loan won’t, but it will have a higher interest rate due to the increased risk. A line of credit may let you draw funds as needed and cap how much you take each month, whereas a term loan gives you the full amount up front. Usually, with more flexibility comes a higher interest rate.
Tags: Finance My Business
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