The Average Interest Rate for Small Business Loans

by Jennifer F. Bender

The average interest rate for a small business loan depends upon a number of factors. One factor is the size of the loan. For example, loans under $100,000 have a higher interest rate than loans over $100,000, according to a July rate report by Bloomberg Businessweek. This is because smaller loans will be repaid at a faster rate than larger loans. In 2011, loans under $100,000 have an interest rate of 7 to 8 percent, whereas loans over $100,000 have an interest rate of 6 to 7 percent.

Another factor to determine the size of the interest rate is the type of institution offering the loan. For example, the Businessweek report indicates foreign banks tend to offer lower interest rates to small businesses than smaller domestic banks do. In 2011, foreign banks offered an interest rate of 6 to 7 percent, whereas small domestic banks offered an interest rate of 7 to 8 percent. Foreign banks can offer a lower interest rate because fewer monetary and

security regulations are in place by those countries.

Another factor lending institutions consider in determining small business loan rates is the type of business being funded. A riskier business, such as an Internet start-up company, will be offered a higher interest rate than a safer business venture, such as an extension of an established food chain. If the small business can show the lending institution that it is a safe investment, the financial institution may consider the investment as a lower risk and, therefore, offer a lower interest rate on the loan.

Other factors can affect the interest rate for small businesses. According to an article on the Work at Home Moms website, these factors include the credit history of the person seeking the loan. If the individual has a poor credit history, the lending institution will offer a higher interest rate. Another factor is the state of the economy, and the U.S. government's actions in that regard. If the government wants to stimulate small business growth, it will offer lower interest rates on loans.

Category: Bank loan

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