Compare Business Loan Interest Rates

02/11/2016

Business loans are available from a wide variety of sources at differing interest rates. Factors which affect the interest rate offered include the size of the loan, the duration of the loan, whether the loan is secured against assets and the perceived creditworthiness of the borrower. It’s important to note when comparing advertised interest rates that these rates are often merely illustrative and that the actual rate offered may be different.

Variable interest rate loans

Some lenders, predominantly banks, offer loans where the interest rate varies with an index rate e.g. the Bank of England Base Rate or LIBOR (the London Interbank Offer Rate). This means that the interest rate paid on the outstanding balance of the loan, and thus the repayments, can vary from month to month or quarter to quarter.

The potential benefit of variable rate loans is that interest rates might fall, reducing the interest paid on the principle. The risk is that interest rates can also rise.

Fixed interest rate loans

The majority of loans offered to businesses are fixed rate loans, which means the rate of interest paid on the outstanding balance remains fixed over the life of the loan. With a fixed rate loan monthly repayments also usually remain constant (exceptions are with deferred repayment or stepped repayment loans) making it easier to forecast future expenditure.

The potential benefit of fixed rate loans is the protection that fixed rates provide from rising interest rates. The potential risk is that market interest rates fall.

It is worth noting that at the time of writing the Bank of England Base Rate is at an historic low 0.25%, so while the potential downside of a fixed rate loan may be very small, the potential downside of a variable rate loan is unlimited.

Comparing rates for long-medium term business loans

Longer term business loans are available for different lengths of time under peer to peer lenders, non-profit lenders and government schemes. Interest rates tend to be lower on longer term loans than on their short term equivalents.

Comparing rates for short term loans

We observed that shorter business loans are most commonly used to provide working capital for day to day expenditure rather than to fund large capital projects. Because short term loans are repaid more quickly lenders tend to charge higher rates of interest, often on a monthly basis. As well as simple fixed rate loans, short term lenders may offer a variety of products designed specifically to meet certain business needs.

* Revolving credit facilities are similar to overdraft facilities in that you only pay interest on the portion of the loan that you draw down.

While short term loans can be attractive for plugging gaps in cashflow, as the loan is often released within 1-2 days, businesses should be careful to check that they can afford the cost of finance. The higher interest rates attached to short term loans can exacerbate any underlying financial difficulties. A longer term forecast of borrowing needs might reveal that a cheaper, longer term loan might make more financial sense. Loans should never be used to finance losses.