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Business Loan Interest Rates - What You Should Know
Almost every business loan comes with interest - it’s one of the key costs to consider when taking out a loan. But it can be difficult to know when you’re getting a good deal on your business loan interest rate.
Written by: Sam Hodgson
Your interest rate is how much it costs to borrow from a lender. Your interest will be calculated differently based on what type of product you have and your arrangement with your lender.
What is the average rate of a business loan in the UK in 2024? What affects this rate, and what can you do get the best interest rate possible? At Clifton Private Finance, we can help answer these questions.
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Understanding the Bank of England Base Rate
Loan Purpose and Business Plan
Fixed vs Variable Interest Rates
The Average Business Loan Interest Rate
What is the Average Business Loan Interest Rate in the UK?
The cost of a business loan depends on a few factors, primarily the type of loan and the overall financial health of your business.
Unsecured business loans typically carry interest rates between 7% and 20% APR, while secured loans (which require collateral) offer more favourable rates, ranging from 4% to 20% APR. Government-backed start-up loans generally have a fixed interest rate of 6%.
Interest rates will typically be higher if your business uses overdrafts or credit cards as short-term financing. Overdrafts usually range from 7% to 11%, and business credit cards can have as much as 20-50% APR. For larger loans or businesses with strong credit, the rates may fall on the lower end of these ranges.
When applying for a business loan, it's essential to consider the interest rate to ensure you are prepared to keep up with the repayments. However, the amount of interest isn't the only thing you should consider. Whether your loan terms are a fixed or variable rate will also determine how much interest you pay on your loan.
Fixed rates remain stable, while variable rates fluctuate with the market, and each has its own unique advantages and considerations. Additionally, while longer-term loans might offer lower rates, you could end up paying more interest over time. Remember to factor in any fees, as they can significantly impact the total loan cost.
Business Loan Calculator
Want to know how much a business loan could cost you? We've developed two tools to help you calculate your business interest rates.
We've used the default rate of 7% to calculate the average monthly payments you can expect:
Your loan details
How much funding do you require? (£):
Repayment term (months):
Annual interest rate (%):
Your results
Monthly payments:
Average monthly interest:
Total interest:
Total cost of finance:
Please note: This is just an example rate and your exact rate will vary based on market conditions and the details of your application.
Or, to get a clearer idea of the rate you can get for your business, you can use our free quote tool below:
Understanding the Bank of England Base Rate
The last year has seen a great amount of uncertainty regarding interest rates and inflation. After 14 consecutive increases between 2021 – 2023, the Bank of England’s base rate had a huge impact on business loan interest rates.
Having some awareness of this core rate is essential to understanding the loan rate you will be able to secure for your business.
When interest rates are low, borrowing is cheap. This entices businesses to take on credit to invest and expand. Both businesses and consumers spend more, increasing the market value of goods and services.
This leads to rising inflation and a situation where those smaller businesses without access to larger funds can struggle.
Conversely, when interest rates are high, borrowing is an expensive undertaking. Businesses have become more financially cautious, and the market has to pull back on raising prices. Inflation slows, and the market can stagnate.
The Bank of England sets its base rate to try to control these and other factors. It is the rate they charge banks and other lenders to borrow money, and it has a knock-on effect on the interest rates those banks and lenders charge borrowers.
Of all factors, the Bank of England base rate is perhaps the most significant when it comes to understanding your end business loan interest rate.
Inflation began to rise drastically, reaching its peak of 11% in 2022, a stark increase from 0.89% in 2020.
The Bank of England began to lift the base rate in 2022 and continued into 2023, causing the interest rates for business loans and other types of finance to rise with it.
Related: Small Business Loans UK - 5 Things to Know
To get an idea of how business loans for limited companies work and see how their eligibility is calculated, watch our short video below:
Read blog: Business Loan Eligibility - 9 Things to Know
Lender Risk vs. Profit
Lending money is a business like any other. Lenders make a profit through the interest rate on your loan, and higher interest rates provide a higher return for the lender.
Every loan is a business transaction with profit at its heart, and, like every business transaction, there is a measure of balancing risk against reward.
If your loan is considered higher risk, some lenders may turn you down, unwilling to take on that risk. Those who are willing to consider your application are likely to charge you higher interest rates to offset the risk on their part.
Related blog: Getting a Business Loan - 8 Top Tips
There are many aspects of this risk, and all of them will have an effect:
Creditworthiness
Your business’s creditworthiness is an indicator of how reliable you have been in terms of repayments and fiscal responsibility, and many lenders will use it in their assessments.
Lenders typically view businesses with poor credit as higher risk. Here, the lender can make a simple adjustment to the interest rate, raising it for businesses with bad credit and lowering it to be competitive for businesses with good credit scores.
Type of Business
A business’s sector will tell the lender a lot about the risk involved. Due to low profit margins and fluctuating income, lenders can see some businesses in industries such as hospitality, agriculture, and even travel as high-risk. Some lower-risk sectors include childcare, human resources, and supermarkets.
Lenders will use your business sector as a guideline for your business's overall viability and, consequently, its level of risk to determine what interest rate will be available to you.
Read similar: How Do Business Loans Work?
See the latest market news below.
2024 Business Finance Market Update
In the past year, business finance saw significant growth, perhaps surprisingly driven by challenger lenders and alternative finance providers. Many of these lenders reached their largest milestones in 2024, primarily through supporting SMEs that may have struggled to access traditional funding elsewhere.
Businesses are continuing to face significant economic challenges carried over from 2023. High inflation, supply chain disruptions, and geopolitical tensions persist, which have complicated financial planning and made it difficult for businesses to acquire funding.
But the Bank of England has cut its base interest rate for the first time in 4 years, signalling a cautious shift toward economic stabilisation after years of inflationary pressure. Further cuts are anticipated, and businesses can expect a flurry of spending in the coming months.
As well as this, a number of banks and large firms seem to be racing to the finish line to implement generative AI and new technology that could streamline business and boost profits. Enhancing tech in banking looks like a win-win for lenders and borrowers, offering more personalised financial solutions and a quicker, more secure process.
In the tech industry, investments in AI are reshaping business. Tech giants like Alphabet, Amazon, and Microsoft have seen their market values surge, driven by the rush to implement AI.
Loan Purpose and Business Plan
A third factor will be your proposed use for the capital. For example, a business loan that is to prop up a dying business is of significantly greater risk than one earmarked to expand a strong business looking to grow in an established marketplace.
Your business plan is a key document that can help mitigate this risk to your bank. A strong business plan will outline your venture and provide answers to any questions a loan assessor might have. Your business plan allows you to prove to someone else just how viable and low-risk your idea is, so make sure you use that space.
A weak business plan in an untested business use space will put off many prospective lenders, leading you to a similar situation as a business with poor credit: trying to get what you can from a limited pool of lenders, each increasing their interest rates to mitigate the risk.
Use our business loan calculator to get a quick quote. Or get a bespoke business loan quote.
Your loan details
How much funding do you require? (£):
Repayment term (months):
Annual interest rate (%):
Your results
Monthly payments:
Average monthly interest:
Total interest:
Total cost of finance:
Collateral
A secured business loan is a financial product where the borrower pledges assets as collateral to secure the loan. The collateral serves as a form of security for the lender, assuring that if the borrower is unable to repay the loan, the lender can seize and sell the collateral to recover some or all of the outstanding debt.
This may sound intimidating, but it's a common practice in the world of borrowing. In fact, mortgages are long-term secured loans. Securing a loan helps mitigate risk on the lender's behalf, which can typically keep interest rates down.
Conversely, an unsecured loan is a loan which doesn't require collateral. On the plus side, this means you don't have to pledge any assets to secure the loan, which can be helpful if you only need a small loan.
But if you are looking to borrow substantial funding, an unsecured business loan will be considered higher risk and will typically have a higher interest rate than a secured loan.
Fixed vs. Variable Rate
Business loans can have fixed or variable interest rates, and the structure and calculation of your interest rate play a significant role.
A fixed-rate, as its name suggests, is set in place for a specific period of time; either a few years or for the full length of your loan. In these circumstances, market forces will not change the rate, and you can budget your repayments accordingly. Fixed rates tend to be slightly higher than current variable rates to reflect this additional security.
A variable rate is tied to the overall market, which may change each month to reflect wider economic events. This means your interest may go up or down depending on the current market.
Whether a fixed or variable rate is a suitable option for you depends on the length of your loan term, the economic environment, and your business's income.
For instance, a fixed-rate business loan with relatively high interest rates may not be appropriate if interest rates are predicted to drop significantly during your loan term.
However, if your business has small profit margins, you may be more willing to pay extra to ensure that your interest rates won't surge if the market changes.
It should be noted that fixed-rate loans will become variable-rate loans after the fixed period expires. For example, a ten-year loan with a three-year fixed rate will become a variable-rate loan after the third year.
It is usually possible to refinance your business loan when the fixed rate period comes to an end, taking advantage of an additional fixed rate term.
Additional Fees
The interest rate isn’t the only way a lender will make money on their loan. Many business loans will come with additional fees, from setup fees to cover administrative costs in assessing your loan to early repayment fees should you wish to pay off your loan early. Other loans may have no associated interest rate but rely on a single fee to profit the lender.
When calculating the overall cost of a business loan, it's essential to understand any associated fees and factor them in as comprehensively as the interest.
The Average Rate of a Business Loan
So, what is the average interest rate of a business loan? As can be seen, it is impossible to say without analysing your business and the overall market. It’s also important to understand that the rate advertised on a loan may not be the rate of your final offer.
The representative APR is the interest rate that more than half (at least 51%) of applicants will receive, but it is not a guarantee of the rate your business will be given once everything has been assessed.
Summary of Business Loan Interest Rate Factors
In conclusion, the following are the most significant factors that will affect the interest rate of your business loan:
- The overall economy, represented by the Bank of England base rate
- Your business credit history and overall creditworthiness
- Your business sector
- The purpose of the loan
- Your business plan and financial forecast
- Whether collateral is used to secure the loan (and the type of collateral)
- Your chosen lender and their product range
Read blog: Business Finance Success Down to AI and Technology
How We Can Help
At Clifton Private Finance, we have a team of dedicated finance and loan specialists who will find the perfect loan to suit your business needs. Our advisors will examine the entire market and walk you through the options available to you to get the best interest rates and lowest fees—as well as a loan type that suits your requirements.
To see what we can do for you, call us on 0203 880 8890 or book a consultation below.
