If you are considering taking out a business loan, it’s obviously important to consider how much it might cost. Essentially, all business loan options operate on a similar principle, which is that you need to repay the initial sum borrowed, plus an additional amount in interest and/or fees.
Here we look at the interest rate you might be charged on different forms of business loans.
An annual interest rate of between 3% and 10% per year might be typical for an unsecured loan.
Secured loan or commercial mortgage
As a business asset has been provided as collateral for the loan, the interest rate might be slightly lower than for an unsecured loan. A commercial mortgage interest rate might be between 2% and 7%.
A merchant cash advance works slightly differently in that you will be quoted a factor rate, rather than an interest rate. If your factor rate is 1.3, for example, the total amount you need to repay will be 130% of the amount borrowed.
However, the merchant cash advance factor rate you are offered might be anything between 1.2 and 1.5.
Again, there isn’t an interest rate associated with this form of borrowing. Instead, the lender will take a small percentage of the value of each invoice – perhaps between 1.5% and 5% – as a fee.
An annual interest rate of between 4% and 8% is often quoted for a hire purchase agreement.
Asset refinancing might have an interest rate of anywhere between 2% and 7%.
With a revolving credit facility, you pay interest on the amount you access, rather than on the overall credit limit. With this product, you should expect to be quoted a daily interest rate, which might be somewhere between 0.05% and 0.1%.
With a bridging loan, it’s unlikely that you will need to make regular interest repayments, and instead, it’s normal to repay all of the capital and interest in one lump sum. However, it’s still important to consider how much this form of borrowing might cost.
With a bridging loan, you will probably be quoted a monthly interest rate, which might be between 0.5% and 1.5%.
Depending on the type of project and your experience in carrying out development projects, the rate quoted to you might be anywhere between 5% and 16% per annum.
Factors affecting the interest rate you might be charged might, depending on the type of loan, include the following:
- Whether you have a good or poor credit history
- The length of time your business has been trading and/or the length of time for which you have been profitable
- Your annual turnover
- The age and condition of any asset provided as security for the loan
- Whether your business sector is perceived to be low or high risk – for example, an internet-based start-up business might be considered to be one of the riskiest
- The length of the loan term – a longer term might mean a lower interest rate
- The size of the loan – a larger loan might attract a lower rate
- Whether the lender you are considering is a high street bank or a specialist niche business lender
- The amount of borrowing you already have in place
FundingBay has access to more than 250 different lenders, ranging from high-street banks to niche independent lenders. We can help you find the right product, the most appropriate lender, and an affordable interest rate. Get in touch with us today to find out more.
If you want to know more about business loans, check our Funding Bay’s calculator!
