Many businesses seek out a loan to help smooth over cash flow turbulence. After all, 80% of businesses fail within the first 5 years and cash flow is a primary make-or-break factor.

However, financial difficulty is far from the only reason to utilise a business loan. Business loans are injections of capital that can help fulfill large orders, purchase equipment and fund marketing campaigns. And borrowing money can be seen as a sign of a healthy business, not a struggling one. In fact, studies have shown that business loans help companies to grow, and too low gearing can be a sign that you’re not reaching your full commercial potential.

There are many business loan options available, though. And the sheer amount of different products and terminology can be baffling. This guide will focus on business rates — that is, the price you pay for a loan. The rate you pay is one of the most important things to understand about a business loan before signing on the dotted line. So let’s break it down…

Like with any transaction, you don’t get something for nothing. The repayment of the amount you borrow (the principle) is not enough for lenders: they want something extra. This ‘something extra’ is known as interest — essentially, the profit that lenders will receive for letting you use their money. This is not a flat fee, though. It comes as a percentage which is applied to the amount borrowed. In other words, the business loan rate is the interest rate. You can think of it as the price you pay for borrowing the money.

Business loan rates are not the same for every business. There are not only a lot of things that influence the interest rate of the loan (see below), but different types of interest rates, too. You can divide them into two main categories: fixes interest rates and variable interest rates.

Fixed interest rates will stay the same over the duration of the loan. You’re guaranteed this rate, and it can therefore be forecasted, predicted and budgeted for accordingly. Variable interest rates, on the other hand, are designed to change according to the market. This is so the lender doesn’t get caught out lending at a very low rate, but then the prices go up elsewhere in the market during this time. Variable interest rates are usually aligned with changes in the Bank of England’s base rate.

APR (Annual Percentage Rate) is essentially a standardised way of looking at the interest rate — it’s calculated annually. APR therefore allows us to see how much interest we will be charged over the course of a year, as well as being able to compare different loans more easily.

Unsurprisingly, APR is enforced through regulation. All member states of the European Union adopted the Directive in 2008, which was implemented under the name Consumer Credit regulation by the UK in 2010. Therefore, it shouldn’t be hard to find the APR of a business loan — if it’s not already obvious, it will most certainly be in the small print.

Business loan interest rates are influenced by many factors. In fact, when approaching a company for a loan, you’ll need to provide a range of information about your operations before you are able to get an accurate business loan quote. This will help the lender decide upon the following:

Business credit rating
A business credit rating is a measure of a company’s creditworthiness. This is on a scale between 0 and 100, with 100 representing a strong, low risk credit rating. This is important because it’s very common to be denied a business loan due to not having a high enough business credit rating. Furthermore, as will become more evident the more you learn about business loans, risk determines the business loan interest rate.

A poor business credit rating indicates that one (or more) of the following applies to you: that you have failed to make repayments in the past, have only been able to pay back minimum amounts, have previously over applied for credit, have had, or still have, high amounts of debt, and/or have even being subject of a County Court Judgement and/or declared bankruptcy.

Business loan amount
The amount you borrow can affect the business loan rate. In most instances: the more you borrow, the harder it will be for you to pay back. This leads to you being a more risky borrower, and so the business loan rate rises. However, it has been known to work the opposite way round when the business is confident that you can make the repayments. Lenders may actually incentivise you to borrow a greater amount by offering a lower APR, because it results in more interest payments overall (think of it as them selling more of their products). This could be brought up in business loan negotiations, but be aware that it can work against you, too.

Business repayment term
The phrase ‘business repayment term’ comes up frequently when searching for loans. It refers to the time in which the borrower will repay the loan, usually in years. Thus, regular repayments are made over the term — so that by the end (maturity date) all repayments have been made and you no longer are indebted for the loan.

To borrow money and ask to pay it back further in the future is usually going to come at a cost. In order to negotiate longer repayment terms, you’ll likely find the business loan rate increases. Even if it doesn’t, invariably the actual nominal repayment amount is going to be greater because you’re re-paying for a longer amount of time.

Business age
The age of a business is important to lenders because it shows whether or not the business model is sustaining itself. A brand new business is yet to prove it is profitable enough to stay afloat, and so lenders will deem them more risky clients. Put simply: business loan rates will likely be higher for new companies and lower for more established businesses.

Business profitability
In order to successfully agree on repayments of a loan, the business needs to be relatively profitable and have a healthy cash flow. A highly profitable business should be more able to make repayments, whereas struggling companies may seek more debt to repay its current debt — which is bad news for lenders! That’s why, unsurprisingly, profitability can determine the business loan rate.

Secured or unsecured
A secured loan means that there is a pre-agreed asset that the lender will repossess and sell in order to cover the loan should the business fail to repay as agreed. This is known as collateral. Lenders love these, as it gives them added security in case a company defaults on the loan. As a result, secured loans will have a much lower APR than risky unsecured loans.

5 examples of business loan rates across various lender types:

Fleximize is a business loan company specialising in offering flexible loans, both big and small, with a tolerant approval policy. Unlike many traditional business loan providers, Fleximize is an alternative financer and offers both secured and unsecured loans to UK SMEs. As the interest rates they charge are relatively high, Fleximize are a  company that you may want to check out only if you don’t fulfill the requirements of the other, low APR traditional business loans or need short term lending agreed quickly (starting at 1.5% per month). The company was founded by Maxim Chmyshuk in 2013, and has since grown rapidly. Today, the company claims to have lent over £100 million to businesses.

  • Available Terms: 1 to 48 months.
  • Available Amounts: £5,000 to £500,000 (SME loans); £500,000 to £1,000,000+ (established companies).
  • Decision Speed: Funding may be received within 48 hours (SME loans).
  • Typical APR: 42.2% APR representative, but this can vary. Importantly, interest is charged on reducing balance, meaning you only pay for the time that you had a loan.
  • Fees: No setup fees or early repayment fees.
  • Eligibility: Minimum annual turnover of £60,000; must be a limited company; minimum of 6 months active trading; loan can be up to 2 months’ revenue.

Yorkshire Bank — of which Clydesdale is its parent company — is a bank that predominantly resides in the North of England. Whilst the bank is slowly being phased into Virgin Money, its business loans should continue to be available. Yorkshire have several business loans available but the Online Business Loan is perhaps the most accessible and is the example below.

  • Available Terms: 12 to 60 months.
  • Available Amounts: £10,000 to £150,000.
  • Decision Speed:v A final decision will be made within 48 hours.
  • Typical APR: 10.2% representative APR on unsecured business loans up to £25,000, though this may differ.
  • Fees: No charge for early repayments or lump sum repayments.
  • Eligibility: Limited company in England, Wales or Scotland; have 18 months of trading history; have at least a year of accounts reported at Companies House; have an annual turnover under £5 million.

Lloyds is one of the most established and well-known UK banks — as such, it needs very little introduction. Lloyds has been ramping up its business loan product line recently and now companies have four different types to choose from. In fact, the bank claims to approve a staggering 9 out of 10 applications, which is promising. Furthermore, if you’re already a Lloyds customer, you can get an instant online decision for a £10,000 (or under) business loan. Both young startups and established companies are catered for here.

  • Available Terms: Up to 25 years (Base Rate Loan); 1 to 10 years (Fixed Rate Loan; 5 to 25 years (Capped Base Rate Loan); 1 to 25 years (Commercial Fixed Rate Loan).
  • Available Amounts: from £1,000 with the Base Rate Loan; £1,000 to £50,000 for Fixed Rate Loans; £50,001 to £1,000,000 for Capped Base Rate Loans; £50,001+ for Commercial Fixed Rate Loan.
  • Decision Speed: Instant quote online, then an instant online decision for Lloyds customers borrowing up to £10,000. Otherwise it may vary from a few days to a few weeks (usually the former).
  • Typical APR: 9.3% is Lloyd’s representative example on a £8,000 fixed or base rate loan, but this is dependent on loan length and amount.
  • Fees: Arrangement Fee of 1.5% when borrowing over £25,000.
  • Eligibility: Must be a sole trader, director or director and be over 18. Other criteria may apply on a case-by-case basis — Lloyd’s are less transparently standardised than the others.

Funding Circle, like Fleximize, is an alternative financing company that aims to grow UK businesses — 52,000 UK businesses have been funded so far. Funding Circle makes a lot of big statements (like APR starting at 1.9%), but have some small print and hidden fees to go along with it. So, when dealing with Funding Circle, be ultra diligent and go through the details with a fine-tooth comb.

  • Available Terms: 6 months to 5 years.
  • Available Amounts: £5,000 to £1,000,000 (loans over £500,000 must be secured).
  • Decision Speed: A final decision can be made in as little as 5 hours, but decision speed is typically 24 hours.
  • Typical APR: Funding Circle claims rates start at 1.9% APR, but will be greater in most scenarios.
  • Fees: Completion fee of 3.9% of the loan’s value. 1% annual servicing fee (included in the interest rate payable by the borrower). No charge for early repayments or lump sum repayments.
  • Eligibility: This is not immediately obvious from Funding Circle’s website. Instead, applicants need to go through the 30-second eligibility test online

Transparency is key when borrowing money, and this is something the UK Government-backed loans can certainly boast — there’s no hidden fees, no unrealistic claims and a reasonable APR.

Here is the rundown on the ever-popular Government-backed Start Up Loan. Before starting though, it’s worth noting that successful applicants are also rewarded with business mentoring for 12 months — a great added benefit!

  • Available Terms: 1 to 5 years.
  • Available Amounts: £500 to £25,000.
  • Decision Speed: Decisions are down to your Delivery Partner, which is localised and to a degree, not centralised. As a result, these loan providers won’t comment on decision speed as it varies.
  • Typical APR: 6%, fixed.
  • Fees: No early repayment fees or application fees.
  • Eligibility: Live in the UK; be 18 or over; have or have a plan for a UK-based business that’s been trading for less than 24 months; provide a business plan and cashflow forecast (the government will provide guidance on this).

Hopefully now you have a better understanding of what a business loan rate is, and how paying back debt capital will impact your operations.

However, be sure to look beyond APR when assessing what business loan to apply for. The decision speed of many traditional financing methods may not suffice for your needs, and more importantly, look for no fees when it comes to early repayments so you can cut down on the total amount you pay.

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