Business Loan APR: How to Easily Calculate Your Loan Cost
When applying for any type of business loan, the APR is an important factor to consider, as it affects the total repayment amount, including origination fees and monthly upkeep charges.
The APR for your small business loan represents the total cost of your loan on an annual basis. If you’re taking out a loan to fund your company’s growth, it’s crucial to weigh the small business loan APR as part of the overall cost.
If you want to learn more about typical business loan APR rates, keep reading to find out how you can be prepared for this part of the application process.
What is Business Loan APR?
APR stands for annual percentage rate and refers to the annual rate that you’ll be charged by your chosen financial intuition when you take out a business loan. The APR for your small business loan includes all fees associated with your loan, including origination fees and interest.
While some small business owners look only for low monthly payments and interest rates, understanding small business loan APR rates can give you a better understanding of your loan cost. Essentially, APR is your business loan interest rate, plus any fees associated with your loan rolled into one number.
It’s possible that one small business lender could offer lower interest rates than others, but their additional service fees might make the loan more expensive than a lender with higher interest rates but no extra fees. That’s why it’s important to compare the APR and not just the interest rate.
When determining the APR for your loan, your business loan lender will use factors like your credit history, approved loan amount, loan term and state of residence. They are required by law to disclose your APR when issuing a small business loan.
When reviewing your loan’s APR, know that it’s an annual cost that will be paid when you make your monthly loan payments.
How Does Business Loan APR Differ From Personal Loan APR?
Personal loans and business loans operate slightly differently. To get approved for your personal loan, your personal credit score and history are reviewed. In comparison, to get approved for a business loan, both your personal and business credit scores are reviewed—making a business loan slightly more difficult to obtain.
In terms of APR, the percentage range for business loans is slightly different than that of personal loans, though your exact APR is dependent on your lender and financial history. However, for both loan types, APR should be considered prior to accepting an offer.
What Are The Most Common Business Loan APRs?
Similar to fixed or variable interest rates, business loan APRs can either be fixed or variable. While a variable business loan APR could be lower than loans with a fixed rate APR, opting for a variable rate means that your APR is subject to change.
Lending to small businesses is risky for banks. Since lender’s funds are less secure when they lend to small business owners, small business APRs tend to be somewhat higher than those for personal loans.
Many business loan lenders offer competitive APRs to attract new customers, so it’s prudent to compare rates. Here are the average business loan APRs of some popular lenders:
- American Express: 6.98% to 19.97%
- Wells Fargo: 7.00% to 22.99%
- SBA Loans: Varies between Prime Rate + 2.25% and Prime Rate + 4.25% depending on term length and business revenue amount.
How Do I Know If I Have “Good” APR For My Small Business Loan?
Your small business loan APR will be determined partially by your financial history, although your lender will ultimately determine how favorable your APR is. To determine if you’re getting the best APR for your business, consider the following:
- Have you compared rates among all available lenders? Because you’ll be quoted a different rate depending on your business size and credit history, the only way to know what if you’re getting “good” APR is to compare quotes between lenders. Try getting information from a mix of traditional lenders and online lenders so you have different rates to compare.
- Have you considered monthly costs? Even though one lender might offer you a lower APR, if the loan term is shorter and actually raises your monthly payments, that might not be a good option for your business. The best small business loan is one that you can afford. Make sure you’re adding monthly loan payments into your business budget so you can determine if it’s the right loan for you.
Frequently Asked Questions
What is a small business loan?
Small business loans are facilitated by The Small Business Administration (SBA), banks, credit unions, and alternative lenders.
Business loans come with set terms, and can either be secured or unsecured. Unsecured loans are confirmed using a borrower’s credit report, while secured loans have some type of collateral to ensure repayment.
It’s usually difficult to secure a loan within the first year of being in business, as lenders usually require proof of revenue to secure loan repayment. Once your company has established credit and a considerable amount of money, you’ll have a better chance of securing a small business loan.
Before applying for any type of business financing , make sure you have your documentation in order. You’ll typically need to submit documents like business tax returns, bank account statements, and lease agreements.
How difficult is it to get business financing?
Some business financing options are more accessible than others, but could have downsides.
Merchant cash advances and business lines of credit are viable options if you need quick cash, but typically have much higher APRs than term or SBA loans. You’ll end up paying lower monthly payments if you opt for a longer term loan, though they can be more difficult to obtain.
Typically, lenders are apprehensive to provide funding to new business owners. Due to this, many of them have time in business requirements, which disqualifies startups.
Do business credit cards have a better APR than small business loans?
If you’re deciding between a business credit card and a business loan to finance your company, you’ll want to compare the APRs.
Let’s take a look at examples of two different business credit cards and loans to compare:
- American Express
American Express offers different levels of business credit cards. Their entry level card is called the Blue Business Plus Credit Card and offers a variable APR of 14.74% to 20.74%. Their APR for a business loan is currently 6.98% to 19.97%.
If your credit score qualifies you for an APR on the lower end, taking out a long term business loan with American Express is probably a better choice. However, their Blue Business Plus Credit Card offers 0.0% APR on purchases and balance transfers for the first year. If you can pay off your credit card balance before the introductory period expires, the credit card could be better than getting a loan.
- Wells Fargo
Like American Express, Wells Fargo offers different levels of business credit cards which range from introductory to platinum.
Their entry level card is called the Business Elite Signature Card and offers a $125 annual fee and there is a 0% APR for the first nine months. After that the interest rate jump to anywhere from Prime + 7.99% to Prime + 17.99%. Their small business loans feature fixed APRs ranging from 7.00% to 22.99%.
If you’re looking for stability, opting for a fixed APR rather than a variable is a better option —meaning the Wells Fargo loan option is better suited for your needs.
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Editor’s Note: This post was updated for accuracy and comprehensiveness in November 2021.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.