The interest rate on a business loan is largely determined based on an independent assessment of your circumstances. There are literally thousands of business loans available on the market right now with interest rates ranging from a few per cent to over 10 per cent, so price variants in the marketplace are huge.
What is an interest rate?
To help you understand what a good interest rate is, let’s go back to basics.
An interest rate is the percentage of money a lender will earn back from the amount you borrow. So, if the interest rate is 7.6%, the lender will receive the amount you borrow back plus 7.6%. The annual percentage rate (APR) is simply the way lenders describe the cost of borrowing over a year.
OK, so what’s a good interest rate for a business loan?
When you borrow money, you will pay back the amount you borrow plus the interest. It is the interest that allows the lender to earn money.
With that in mind, if you borrow an amount between £10k and £500k for your business, an interest rate of 5 to 10 per cent is typical. This is sufficient to allow the lender to earn money on the product while keeping your repayments affordable.
Anything lower than 5 per cent is considered exceptional. An annual percentage rate (APR) of 3.6%, for example, is very desirable. However, high-street banks rarely offer such enticing interest rates. For low, low rates, independent lenders are best. Nationwide Corporate Finance are a good example of such an independent lender.
How do lenders determine interest rates on business loans?
The interest rate you can expect to pay a business loan depends on a few factors. Following, we’ll look at these factors to determine what a good interest rate is.
1. Bank of England
The Bank of England sets the bank rate or base rate for interest, which directly influences the interest rates set by banks and independent lenders. If the base rate goes up, it is likely banks will also raise their loan prices. If the base rate goes down, then banks can lower their entry-level interest rates for new customers.
2. Your credit score
Your credit score is a 3-digit number that determines how likely you are to be accepted for credit. The score is based on your credit history. A low credit score carries a higher financial risk for lenders, who then raise the interest rate accordingly.
3. Loan market conditions
It is a fact that in times of uncertainty and financial turmoil, banks like to ‘shut up shop’ and reduce the amount they lend to new customers. This is achieved by either removing products from the market or raising interest rates.
4. Loan term
Although this does not play a factor with all lenders, how long you want to take to repay the amount you borrow can influence interest rates. The shorter the period of the loan, typically the higher the interest rate will be with come lenders.