What’s the average business loan interest rates?

On Monday, I shared with you how business loan rates are determined. Today I want to share the average business loan interest rates and where I believe they are heading.

As a refresher, business loan interest rates vary based on various factors. Many of which are specific to your loan application and your business. But they can also be impacted by economic and market conditions. Therefore, the idea of average business loan interest rates is a bit of a misnomer.

I can tell you that the average business loan interest rate is much higher these days. That’s because, like personal interest rates, the underlying indices have been climbing as the Fed raises its Fed Funds Rate.

Let’s revisit indices for a moment.

Lenders have a cost of funds (paying for deposits or borrowing money themselves) that they want to earn a margin against. For example, if their cost of funds is 3% and they want a 3% margin, they are targeting a 6% average business loan interest rate.

Riskier loans will have a higher rate than that, and some will have a lower rate.

The key to understanding where business loan rates begin is the underlying indices lenders can choose to peg their rates against.

The Wall Street Journal Prime Rate is a common index for lenders to use. It sits at 7.75%. However, just one year ago it was at 3.25%.

Another option is LIBOR, a London-based index that SOFR is replacing. If your loan request was for a one-year loan term and the lender was using LIBOR, you would take the one-year LIBOR rate + the margin the lender wants to earn (3% is a good assumption) to determine your rate. You’d pay 5.505 + 3% or 8.505% in that example.

If instead, the lender used Treasuries as a guide, in the above example, you’d pay 4.995% + 3% or 7.995%.

Now let’s use that information to see what the average business loan rates are right now.

Remember, loads of factors determine the rate. So, it is hard to peg a true average. However, for conversation's sake, let’s see if I can’t at least give you an idea of what to expect.

With most of the major indices starting in the 4.5%-5% range, I would be shocked if you can get a business loan for lower than that right now.

I would tell you to expect the average business loan interest rates to rest between 5%-8% for a strong application.For riskier applications, such as those without collateral or newer businesses, I expect 10%-12% interest rates.

So that you have a reference point, a $100,000 loan on a 5-year term/amortization at an 8% interest rate is a monthly payment of around $2,000 per month. Your business needs to demonstrate that it can afford that kind of payment. Since lenders like borrowers to have a cushion in their cashflow, you will ultimately need to show free cash flow in your business of around $2,500 per month to have the normal 1.25x debt-service-coverage-ratio they like.

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