Small business loans are the lifeblood of many small businesses, as they offer financing that owners can put toward operational costs, staffing, real estate and other expenses. The cost of those loans has climbed over the last year and remains high as 2023 comes to an end.

If you’re looking to get a small business loan in 2024, you’ll need to be prepared for high interest rates, at least in the near future. High interest rates make it all the more important to improve your application before applying and to compare offers from various lenders as they can have a significant impact on the cost of your loan.

Small Business Loan Costs

The cost of your small business loan depends on a variety of factors, including the lender you choose and your interest rate, fees and repayment terms.

Interest

Interest is the cost of borrowing money, and rates can vary by lender and loan type. Business loan lenders typically offer a range of rates based on an index, such as the prime rate. Your financing offer will have an interest rate within that range based on your and your business’s financial profile.

Borrowers with excellent credit, strong business revenue and several years in business tend to qualify for the best interest rates. Weaker credit, unstable revenue or less time in business could mean you end up with high rates, as that shows a lender that you’re less likely to be able to repay the loan.

Interest rates on loans from the Small Business Administration (SBA) are similarly negotiated between the lender and the borrower, though they can’t exceed the SBA’s maximum interest rates.

Fees

Along with interest charges, you might have to pay fees to borrow a small business loan. Common fees include:

• Origination fee. This is the cost of processing your application and loan. It often is a percentage of your loan amount and may be deducted from your loan proceeds.
• Prepayment penalties. Some lenders will impose a penalty if you repay your loan ahead of your agreed-upon repayment term.
• Late payment fees. If you miss your payment due dates, you could have to make up your payment plus an additional late fee.

Terms

Loan terms vary by lender and loan amount, but you may come across options ranging from one year to 10 years or more. Some SBA loans offer repayment terms as long as 25 years, but they have specific uses.

According to a Forbes Advisor survey of 500 U.S. adults who applied for a business loan, more than half of borrowers chose loan terms of one to three years, while 28% had terms of four to six years. Only 1% selected loan terms of 10 years or longer.

Small Business Loan Interest Rates Through 2023

Many lenders rely on the prime rate to determine interest rates on small business loans. The prime rate is a baseline interest rate that’s often based on the Federal Reserve’s federal funds rate.

The Federal Reserve has increased the federal funds rate 11 times since March of 2022, resulting in higher interest rates on small business loans and other consumer lending products. At the time of writing, the bank prime loan rate sits at 8.50%. By contrast, the prime rate was only 3.25% to 3.5% between March 2020 and March 2022.

Rates Are High Going Into 2024

After two years of low rates, borrowers saw rates rise sharply over the past two years as the Federal Reserve tried to combat inflation. The prime rate is more than twice as high as it was two years previously.

It’s impossible to predict whether rates will continue to rise in 2024 or start to cool off. If rates remain high or increase again, you’ll need to consider how a more expensive loan will impact your customers, workforce and revenue.

If rates decrease, you may find more affordable loans and lines of credit for your business. At the very least, rates are currently high and will remain high in the near future.

How To Compare Business Loans

There are several details to consider when comparing business loan options. Here are some key features that can help guide your decision:

• Interest rate. Your rate impacts both your overall loan costs and the size of your monthly payments. Rates vary by lender and loan type.
• Repayment terms. The amount of time you have to pay back your loan also determines your monthly payments and total interest costs.
• Fees. Find out if the lender levies any fees that could add to your borrowing costs.
• Loan amounts. Available loan amounts vary by lender, so look for a financial institution that can offer the amount your business needs.
• Funding speed. If you have time constraints, you may prioritize lenders that can underwrite and disburse your loan quickly.
• Lending reputation. Read over online reviews to see what other customers have to say. This step can also help you avoid predatory lenders that charge overly high interest rates and fees.

As you compare loan options, use a business loan calculator to estimate your monthly payments and long-term loan costs.

How To Qualify For the Lowest Possible Rates

Although interest rates are high, there are steps you can take to qualify for the lowest rate available. Here are some actions that could help:

• Improve your credit. Credit plays a significant role in the interest rate you’ll be offered. With a small business loan, lenders could look at both your business and personal credit scores. Although some lenders accept personal credit scores as low as 500, you’ll need a good score of 670 or higher to access the best rates. If you don’t need the loan right away, take some steps to improve your credit before you apply. These could include reducing your credit utilization and making on-time payments on your loans.
• Stabilize your business revenue. Lenders want to see that your business makes steady revenue to ensure you’ll have the means to pay back your loan. Typically, you’ll need a minimum annual revenue of $100,000, though some lenders require at least $250,000. Making sure your revenue is strong may help you get a loan with more favorable terms.
• Present a strong business plan. Lenders may want to see your business plan, including information on how you’ll use the loan and repay it. A thoughtful, well-researched business plan could make you a more appealing candidate for a loan and potentially help you get a better interest rate.
• Shop around. Every lender is different, so compare offers from multiple institutions to find the best rate. You might check with several different types of lenders, such as banks, credit unions and online lenders. For some business owners, an SBA loan may provide the lowest rates.

Small business lenders also often require that your business has been operating for a minimum of six months to two years. A well-established business may qualify for better rates and terms on a small business loan than a recently launched startup.

Survey Methodology

This online survey of 500 Americans who have applied for a business loan was commissioned by Forbes Advisor and conducted by market research company OnePoll, in accordance with the Market Research Society’s code of conduct. Data was collected from July 12–July 20, 2023. The margin of error is +/- 4.4 points with 95% confidence. This survey was overseen by the OnePoll research team, which is a member of the MRS and has corporate membership with the American Association for Public Opinion Research (AAPOR).