The average interest rate for small business loans at the beginning of 2021 is 2.77%. The interest rate charged for small business loans varies widely depending on the type of business, the type of loan, and the type of lender chosen. Interest rates on bank loans to small businesses commonly range between 1.7% to 5.4%, while alternative lenders generally charge higher rates.
AdvisorSmith found this estimate for small business loan interest rates using data from the Federal Reserve’s Small Business Lending Survey, which covers bank lending to small businesses with up to $5 million in sales. The loans included in this estimate are bank-issued term loans to small businesses with either fixed or variable interest rates.
For fixed-rate loans to small businesses, the average interest rate was 2.6% at the beginning of 2021, while the average interest rate for variable loans was 4.24%.
Historical Interest Rates for Small Business Loans
Average interest rates for small business loans fluctuate over time based upon rates set by the Federal Reserve System, bank capital regulations, as well as market conditions. In the table below, we list the average interest rates paid by small businesses for term loans obtained from banks.
| Year | Fixed-Rate Loans - Interest Rate | Variable Rate Loans - Interest Rate | Small Business Loans - Interest Rate |
|---|---|---|---|
| 2020 | 2.60% | 4.24% | 2.77% |
| 2019 | 5.65% | 5.36% | 5.58% |
| 2018 | 5.67% | 5.70% | 5.68% |
| 2017 | 5.41% | 4.84% | 5.24% |
Small Business Loans: Interest by Type of Lender
The type of lender has a significant impact on the interest rates charged for small business loans. Typically, loans from traditional banks and credit unions have the lowest interest rates. However, these loans are also more difficult to qualify for, requiring substantial business history or assets. Alternative and online lenders charge higher interest rates but may make it easier to qualify for loans for some small businesses.
| Type of Lender | Average Interest Rates |
|---|---|
| Banks or Credit Unions | 1.7% to 5.4% |
| Alternative or Online Lenders | 4.8% to 30.1% |
Online and alternative lenders are another option for small businesses who wish to pursue loans for their businesses. Usually, online lenders charge higher interest rates when compared with traditional banks or credit unions. However, the underwriting process for these lenders can be much quicker than traditional banks, and many more types of small businesses are eligible for loans from alternative lenders.
For small businesses without a robust credit history, such as new businesses or those whose owners don’t have high credit scores, alternative lenders can be a good option. They can also be a good option for businesses that need funds quickly, as their loan processes can be much quicker than traditional banks. The table below lists some online lenders and the range of interest rates that these lenders offer.
| Lender Name | Interest Rates on Small Business Loans |
|---|---|
| Bluevine | 4.8% and up |
| Dealstruck | 9.99% to 21.99% |
| Credibility Capital | 6.99% and up |
| Credibly | 9.99% and up |
| Fundbox | 4.66% and up |
| Funding Circle | 11.29% to 30.12% |
| LendingClub | 4.99% to 24.9% |
| Lendio | 6% and up |
| OnDeck | 11.89% and up |
| SmartBiz | 4.75% to 24.99% |
Small Business Loans: Business Factors Influencing Interest Rates
Small business loan interest rates can be influenced by a variety of factors related to a small business. These factors include the type of the business and its financial condition, the credit scores of the business and the owners of the business, as well as any existing relationship the business has with a financial institution.
Business type influences the type of loan that a business can qualify for, and in turn, influences the interest. For example, many banks will only make loans against assets that a business owns, such as inventory, or will offer rates that are lower for loans that are secured against valuable assets. Additionally, lenders examine the financial condition of small businesses when making loans. The smaller a loan is relative to the ability of the borrower to repay, the more likely that the business will be approved for the loan.
Lenders also examine the creditworthiness of both the business itself and any owners of the business in order to determine the interest rate for small business loans. The metrics used for measuring creditworthiness include business credit scores and personal credit scores such as FICO scores. Additionally, the lender will examine any other outstanding loans or indebtedness that a borrower may have.
If a small business or business owner has a pre-existing relationship with a financial institution, this can also lower the interest rate on loans in some cases. For example, if a small business has a checking account with a bank, this may qualify for lower interest rates on loans. Additionally, if a borrower utilizes other products from a lender, such as other loans, and has a solid record of repayment, they may also qualify for additional discounts.
Expert Commentary
Dr. Kent Belasco is the Director of the Banking Program and Adjunct Assistant Professor of Finance and Banking at Marquette University. Dr. Ray Bowman is the Director for the Ventura and Santa Barbara Small Business Development Center and Lecturer at California State University Channel Islands. Paul Wilson Jr. is Area Director of the Small Business Development Center at Georgia State University. They provided answers to key questions on small business lending.
What are the effects of low interest rates on small business lending, especially given the reduction in rates over the past year?
Dr. Kent Belasco: Low interest rates erode the net interest margin of banks. Banks earn less net interest income which is their primary revenue source. Net interest margins are down about 60 to 100 basis points since last year.
So, first, low interest rates are positive for small businesses because the cost is lower—good for them, not so for the banks. Although banks are lending to small businesses, they tend to carry more risk and not a lot of revenue. So, aside from PPP loans, which are guaranteed, banks have focused more on the needs of their direct customers in the pandemic. So, many small businesses may not have been able to get funding as they needed and had to consider other alternatives.
Dr. Ray Bowman: I don’t think the reduction in interest rates has been that impactful since most small business term loans are fixed rates. Further, I think that small businesses may experience increases since a lot of their funding comes from credit cards.
Paul Wilson Jr.: Traditional small business lending (not including SBA disaster loans) over the past year has been extremely slow. Many lenders were concerned about the overall economy and were also consumed by offering disaster loans, so they reduced their regular small business lending dramatically.
As the economy bounces back (it’s not quite all the way there for many industries), hopefully, they will keep low rates that would encourage more small businesses to seek regular small business loans. However, it will ultimately be up to the lenders to promote borrowing during this still somewhat uncertain time.
What trends do you foresee for business interest rates in the coming years?
Dr. Belasco: Rates will remain low per Jerome Powell of the Fed. He originally said he would hold them low for the next 2-3 years. Although I do believe they will remain low, we shall see how the economy recovers as more and more people are vaccinated. With pent-up demand and people with stimulus checks and savings, once they are vaccinated, the likelihood of a heated-up economy can occur.
Since businesses have been shuttered and supplies are lower when this occurs, demand will exceed supply and prices will go up—inflation. If this jumps too high, the Fed will raise rates to curb it. Usually, the Fed does this when inflation exceeds 2%, but I think Powell is willing to let it drift above this a bit before raising rates. So, we will see, I think, in the next 2 quarters what will happen. I don’t believe rates will increase—if they do—that significantly, though.
Dr. Bowman: What we’re hearing from many of the banks that we work with is that most of the larger changes are going to occur in late 2022.
Wilson: That’s hard to predict, but I believe they will continue to trend in the direction of the economy.
What is the impact of nonbank and alternative lenders on the small business lending market?
Dr. Belasco: Nonbank and alternative lenders, such as CDFIs (community development financial institutions), such as WWBIC in Milwaukee, are swamped with prospects. So this is where [small businesses] are going if they can’t get it from banks.
Not surprisingly, we need small businesses because that is where the jobs are. So, these groups, along with SBA guarantees, will likely play a bigger role until things stabilize. Actually, it is good that CDFIs are available for these small businesses. [It] gets them started and develops a history so that they can later go to a bank.
Dr. Bowman: Alternative lenders have had a huge impact on providing access to capital for small businesses through the pandemic. Further, many of these alternative lenders provided more opportunity for access to capital for underserved populations. The fact that loan recipient information is public will also provide an opportunity for these alternative lenders to outreach to a lot of small businesses using traditional lenders.
Wilson: It created more opportunities for small businesses because the larger lenders over the past year have tightened up their qualification requirements. More options in the marketplace will benefit small businesses that have trouble getting loans from traditional lenders.
Methodology
To find the average small business loan interest rate, AdvisorSmith used data published by the Federal Reserve’s Small Business Lending Survey. We considered loans made to small businesses with up to $5 million in sales, which is the definition of small business according to the Federal Reserve. Loans included in this survey are commercial and industrial loans made to U.S. nonfarm small businesses by bank lenders. In the most recent quarter of this survey, 105 banks and financial institutions were included in the survey.
We determined the average interest rate by taking the weighted average interest rate for both fixed and variable rate term loans issued by banks to small businesses. We also calculated the interest rate for each of the previous years back to 2017. To find the interest rates from alternative lenders, we collected interest rate information from their published websites.
Sources
- Federal Reserve Bank of Kansas City, Small Business Lending Survey