The Average Small Business Loan Rate
As the credit crunch of 2008 illustrated, many small businesses rely on the availability of credit to weather recessions. Because of this, most business owners deal with small business loans -- often called micro loans in the banking industry -- as a means of short-term financing. Finding the most favorable terms on a small business loan can be difficult because of many variables such as a borrower's credit rating, the prime interest rate and specific terms.
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Basic Rates
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As with any other form of financing, a small business loan's interest rate fluctuates with the prime rate set by the Federal Reserve, and rises and falls in relation to inflationary concerns and the economy's need for credit. The Small Business Administration provides federally subsidized loans to many small businesses through its 7(a) loan program, which offers maximum rates of prime plus 2.25 percent to qualified lenders. Many of the most competitively priced commercial loans offer a similar rate, although this rate may not be available to all businesses.
Rate Surveys
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Because interest rates fluctuate so much by the state of the finance market and the prime rate, some organizations such as the Federal Reserve and the National Federation of Small Businesses track the average rates provided by major lenders or rates reported by borrowers. Business media, such as Bloomberg Businessweek, aggregate much of this data, which is usually reported quarterly and provides some insight on average rates.
Forces Influencing Rates
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Although surveys may create a picture of the average small business loan interest rate nationwide, each loan and each lender's situation is different, making extrapolating data from broad, general-level surveys difficult. Each small business' rates vary by their previous credit history and their relationship with their bank. Other factors that influence a small business loan's interest rate include the amount borrowed and the length of the loan. For example, larger, short-term loans frequently receive better interest rates than smaller loans with a longer amortization schedule.
Personal Loans in Lieu of Business Loans
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In cases where a business has poor credit or hasn't been around long enough to establish credit necessary to secure a loan, some business owners turn to personal loans to finance their companies. Although these rates are based on the same general forces that influence small business loans -- the prime rate, loan size and the borrower's credit score -- financing may be approached differently from this angle, a boon to entrepreneurs whose unproven methods or high-risk ventures may disqualify them from a small business loan. Depending upon how the loan and the business is structured, however, business owners may be required to claim payments taken from the business to repay personal loans as income, and pay taxes upon it.
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