If you’re a small business owner looking for ways to grow your business, you’ve likely investigated the possibility of acquiring some outside financing in the form of a business loan. Also known as debt financing, this form of funding can be preferable to venture capital, because you maintain control of your business rather than selling off decision-making power in exchange for capital.
That being said, the world of small business financing is complex, with many possibilities—some good, some not so good. And the last thing you’ll want to do is pay more for funding than necessary.
If you’re new to the concept of small business financing, you may not know what qualifies as a good interest rate or a bad one. With that in mind, let’s review what makes for a good interest rate for the various financing options out there and what to look for when comparing products.
What are your small business financing options?
It’s important to note that there are many kinds of financing options available to small business owners. A term loan is probably what you think of when you imagine a small business loan, but it’s far from the only possibility—other financing products may make more sense, depending on your situation.
Here’s a quick rundown of the most common small business financing options:
- Traditional bank loans: A term loan from the bank, where the bank extends you a set amount of money and you repay it in installments over a set period, is still the cheapest loan product out there. It’s also the most difficult to qualify for.
- SBA loans: The Small Business Administration helps small businesses qualify for low-interest bank loans by guaranteeing the majority of the loan amount. This is also a difficult, competitive loan product to qualify for.
- Equipment financing: If you want to buy a specific piece of equipment with your capital, you can receive the exact amount from an equipment financer.
- Lines of credit: These flexible forms of financing are pools of money that business owners can draw from over and over again as needed.
- Invoice financing: Instead of waiting for a client to pay off an invoice, you can finance that invoice and receive most of what you’re owed up front.
- Short-term loans: These are term loans from an online lender with a short repayment period and a higher interest rate than what you might get from a bank.
- Credit cards: Business credit cards function as a short-term form of financing that allows you to rack up reward points as well.
- MCA: A merchant cash advance is not a loan—it’s when a financing company advances you cash in exchange for a piece of your daily credit and debit card sales, plus a fee.
What is a good interest rate for these financing options?
You’ll rarely find that a lender will extend the exact same terms to different borrowers. Every lending situation is different because every business is different.
There are general ranges for financing interest rates, however. Where an offer lands within that range is subject to the lender itself, as well as the borrower and their financial situation and future plans—including the business owner’s credit scores, the time in business, their industry, what they plan to use the financing for, and more.