Disclaimer: Information in the term loan articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the term loan articles often covers financial products that Biz2Credit does not currently offer.

The median business loan interest rate from a bank in mid-2024 was 7.92% for new borrowers, according to Federal Reserve data. But without strong financials, you might not qualify for the best business loan rates.

Qualifying for the lowest rate possible is critical because each additional decimal point increases the cost of your loan repayment. Borrowing at a high annual percentage rate — APR accounts for the simple interest rate, plus annualized fees — could burden your company’s cash-flow.

With that in mind, here are five tips to pay less business loan interest if you’re a new borrower, plus advice on savings for your current business debt.

1. Perform a financial check-up

Increasing the interest rate on a business loan is the lender’s way of protecting itself from the possibility of your business’s decline or failure. To get a decreased rate, see how your firm measures up against traditional business loan eligibility criteria. They include:

• Time in business: Veteran business owners can access lower business loan interest rates.
• Industry: Some businesses are riskier than others, and some (such as gambling and cannabis) aren’t eligible to borrow with certain lenders.
• Revenue and cash-flow: A proven sales record can improve your loan application (while unpredictable, perhaps seasonal, figures can do the opposite).
• Personal and business credit: The longer your credit history, the cheaper your loan will be to repay (more on how to improve your credit below).
  
  Once you find weaknesses in your business’s financials, fixing them could lead to an interest reduction.

2. Improve your credit

One of the first and most important metrics for any lender is your credit score. So, when you’re looking to secure the lowest possible interest rate, it pays dividends to start with improving your personal score. Here are near-term impactful ways to do just that:

• Pay your bills on time
• Zero your credit card balance each month
• Dispute errors on your credit report with the reporting bureau (Equifax, Experian or TransUnion)
• Track your credit score, perhaps for free via your bank or credit card issuer or by paying for a third-party service
  
  Don’t worry: Lenders can use your personal credit to evaluate your loan application (and potentially award low small business loan interest rates) if you haven’t yet established your business’s credit profile.
  
  Tip: It’s wise to keep your personal finances separate from your business’s. Consider opening a separate bank account and credit card specially for your business operations. Then, start to build your business credit.

3. Research lenders and loans

There are many ways to borrow money for your business. Thoroughly researching your options will help you borrow the right loan type from the best possible lender. It can also ensure you get a lower interest rate.

Take these steps as part of your leg work:

• Consider your business needs to determine your ideal loan type. A line of credit might be more advantageous if your funding requirements could change over time.
• Confirm your desired loan amount and that it fits within the loan limits of lenders.
• Compare multiple types of lenders, including banks, credit unions, online lenders and marketplaces, even peer-to-peer funding platforms. And don’t forget that a lender you already bank with might reward you with loyalty-style rate discounts.
• Prioritize lenders that offer prequalification, the ability to confirm eligibility and check potential business loan interest rates without a hard credit check.
• Look up lenders’ track records regarding funding loans on time and keeping their customers happy, perhaps by reading online reviews.
  
  As you’re doing your homework on lenders, understand that nuances can lead to a higher or lower business loan rate. For example, you’ll likely find a lower rate on a term loan versus a line of credit. For another example, you might find that online lenders with faster loan closing, funding timelines carry higher business loan interest rates.

Related >> Tips for Getting Your Small Business Loan Approved

4. Consider adding collateral or a cosigner

Unless you have truly excellent (personal or business) credit, there are always ways you can strengthen your application. The most impactful ways include:

• Adding collateral: While it’s more common for lenders to insist on a personal guarantee (that you’ll repay a business debt with personal assets if your business fails to), you might be asked to supply collateral. Pledging assets, such as material business-owned items or commercial real estate, can lower a lender’s risk profile and, potentially, your interest rate. Keep in mind that if your repayment goes awry, the lender could seize the collateral.
• Finding a co-applicant: Like with consumer loans, it can be extremely helpful to apply for business loans alongside cosigner who has a stronger credit history (and overall financial resume) than you do. You could piggyback your way to a significantly reduced business loan interest rate. Be aware that if your business struggles in repayment, it would shift the responsibility (and potential credit risk) to your cosigner’s ledger.

5. Fine-tune your business plan

Just as you’d prepare a resume and portfolio when job-hunting, put time and effort into a thorough business plan when seeking financing. A strong plan won’t necessarily make up for a low credit score or out-of-whack debt-to-income ratio, but it could give lenders greater confidence in your ability to repay the debt. As a result, they might reward you with a lower interest rate.

Related >> All the Documents You Need, Explained

How to pay less business loan interest on your current debt

Now, let’s say you’ve already borrowed a business term loan or line of credit and are aiming to lessen the toll of interest. Here are strategies to consider:

Repay your debt early to avoid compound interest

There are two ways lenders calculate interest:

1. Simple interest: A lender will require repayment in a certain period at an amount somewhere above the original amount owed. For example, if you have a simple interest rate of 20% on a loan of $100,000, you will repay $120,000 over the life of the loan.
2. Compound interest: It’s at certain predetermined intervals and is based on the remaining balance of the original loan in addition to previously accrued inte

Bottom line: If you repay compound-interest loans ahead of schedule, the interest will be lessened. So, whether your loan interest is compounded daily, weekly, monthly, or annually, it’s wise to pay it back as soon as possible.

Refinance your business’s debts (if the math makes sense)

There are plenty of situations where refinancing your business’s debts is the best way to reduce your interest costs. And refinancing might also make your business simpler to run.

Consider these scenarios:

1. You acquired multiple loans at high interest rates at the beginning of your business, and your finances have since improved. You could consolidate the outstanding debt into a single loan with a reduced rate.
2. You started your business with a short-term loan at a high interest rate and now have stronger financials. You could use your improved circumstances to secure a longer-term loan to cover the original. That way, the original lender gets paid, you pay a lower interest rate, and the new lender is in business with a partner they can be confident will pay them back in full.
3. You want to turn your business’s success into a new loan type. For example, perhaps you were turned down for an SBA loan previously but would now qualify.

FAQs about Business Loan Interest Rates

How do business loan interest rates work?

Lenders typically advertise simple interest rates or APRs. However, some lenders feature factor rates (particularly for merchant cash advances).

Talk to lenders about how they calculate their business loan interest rates. Then, use free online rate calculators to ensure you’re making apples-to-apples comparisons.

Are business loan rates fixed or variable?

Business loans can carry either fixed or variable rates. Fixed rates mean your rate and monthly payment may go unchanged throughout repayment. Variable rates typically start lower but could increase over time, bringing uncertainty to your business’s bottom line.

Do business loans also carry fees?

Yes, most forms of financing charge origination, underwriting, and other fees. That’s why it’s helpful to compare APRs instead of simple business loan interest rates when you shop around for a lender. An APR accounts for fees and gives you a more complete picture of a loan’s cost.

How do lenders determine your interest rate?

Lenders consider key underwriting criteria, including your credit and business history, to determine whether to grant loan approval and at what rates.

How can you get a lower rate on your business loan?

Improve your credit and financials and research lenders and products. Also, strengthen your application, perhaps with collateral, a cosigner, or an awesome business plan. If you’ve already borrowed a business loan, you might reduce your rate by prepaying your debt or refinancing, but rates will vary depending on the lender.

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