Is a Business Loan Going to Cost You More In 2024?
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Business loan interest rates have increased significantly in the past couple of years. The prime rate — which many business lenders use as a benchmark to determine loan rates — has more than doubled from 3.5% in March 2022 to 8.5% in July 2023. It has remained there as of November 2023.
There are several different kinds of business loans, which means the impact of higher interest rates could impact you differently depending on the type of financing you qualify for. But if you’re a business owner planning for 2024, you might wonder what will happen to business loan rates in the coming year. Here’s what to know.
Will interest rates go down?
It’s impossible to predict exactly what business loan interest rates will look like in 2024. However, the consensus among economists is that they’ll likely go down, though only slightly.
Like many consumer loans, business loans are often priced using a benchmark interest rate known as the prime rate. This rate is directly influenced by the federal funds rate, which the Federal Reserve manipulates to manage inflation. Since March 2022, the Fed has hiked this rate 11 times.
But the inflation rate has been slow to come down, and the Fed is expected to keep rates high through the next year. Economists from major banks expect the Fed to lower its rate by 1% by the end of 2024, which should translate to a corresponding decrease in business loan rates.
Our prediction
Ultimately, whether business loan rates will increase or decline mainly depends on whether the rate of inflation leads the Fed to lower or hike the federal funds rate. A decline could lead to reduced rates for consumer loans while a hike would likely lead to slightly higher rates.
“The consensus (on what will happen) changes every day,” says Cristian deRitis, deputy chief economist at Moody’s Analytics. “But right now, it looks as though we are going to remain at the current level, probably no more hikes from the Fed throughout at least the first half of 2024.”
If that’s enough to slow down price growth toward the Fed’s 2% target inflation rate, expect rates to start dropping. “Even though we may not be at 2% by the middle of next year, the trend will be sufficiently downward that the Fed could start to ease off,” says deRitis. “There’s a lot of debate in terms of when exactly. Is it going to be early summer or is it going to be later in the year? That really depends on your views.”
For inflation, and therefore business loan interest rates, to come down significantly, car prices and housing costs, particularly rent, must come down, according to deRitis. Additionally, wage growth needs to moderate.
“This is the one that’s difficult for people to accept because, of course, we want households to have higher wages that support spending and the overall economy,” he adds. “We don’t need wages to fall, we just need that growth rate to moderate from about 4.5% to 3.5% percent, which is consistent with 2% inflation.”
How business loans look now
Business loan rates and terms can vary wildly, depending on the type of financing you choose as well as by lender. Small Business Administration (SBA) loans, for instance, tend to offer competitive rates to established businesses.
Here are the maximum interest rates for the popular SBA 7(a) loan program based on the current 8.5% base prime rate as of November 2023:
Loans from private lenders, on the other hand, still carry single-digit interest rates — sometimes under 10% for the most creditworthy customers who have established businesses. In general, loans secured by collateral offer the most affordable rates and terms.
For newer businesses and startups, however, online loans, lines of credit and other forms of business financing can be much more expensive. Some short-term financing options are showing interest rates as high as 60% or more.
What is a good business loan interest rate?
In general, a good interest rate is usually considered to be a rate lower than the national average. However, average rates for business loans vary widely depending on the type of financing you apply for — from as low as 4% on some SBA loans up to 60% or more on business lines of credit, according to Lendio.
For example, established businesses with a strong credit history and financial track record might be able to qualify for an interest rate below 10%. However, businesses that are only a year or two old or business owners with bad credit might have to make do with interest rates of 20% or higher.
Additionally, keep in mind that some business loan lenders use factor rates rather than interest rates for their loans. This is essentially a flat fee based on the amount you borrow, compared to interest charges that can vary over the life of a loan depending on how the interest is compounded.
Tip: As you consider your options, be sure to shop around and compare your options with multiple types of business financing from a variety of lenders. This will help you find the best deal available to you.
How to compare the best business loans
It’s important to shop around and compare loan offers from as many lenders as possible before you apply for one. This way, you can find a good deal on a business loan that suits your needs. Here are some important factors to consider as you weigh your options:
Eligibility criteria
Business loan qualifications can vary by lender. However, you’ll typically have to meet minimum requirements for your personal or business credit, how long your business has been in operation and annual or monthly revenue.
Be sure to double-check what standards you’ll need to meet with each lender you’re researching so you know what to expect if you choose to apply.
Interest rates
Your interest rate (or factor rate, in some cases) plays one of the biggest roles in determining your total borrowing costs. You’ll generally need a good personal credit score (usually considered to be 670 or higher) or excellent business credit along with a well-established business to qualify for the best interest rates on business loans.
Tip: Many lenders let you pre-qualify with only a soft credit check that won’t hurt your credit score. This is a great way to get an idea of what rates and terms you might qualify for before submitting a full application.
Repayment terms
Business loans can come with short or long repayment terms, which will impact how much interest you pay over time. While longer repayment terms mean having lower monthly payments, you’ll end up with higher interest costs. In general, it’s best to choose the shortest term you can afford to avoid paying excessive interest.
Also keep in mind that while some business lenders default to monthly payments, others might require weekly or even daily payments, depending on the type of financing you choose.
Tip: Use our business loan calculator to get an idea of what your payments could look like with different repayment terms and interest rates.
Fees
Some lenders charge fees — such as origination fees, monthly fees or prepayment penalties — on top of the interest, which can add to your overall costs. Make sure to ask the lender about potential fees so you have an idea of what to expect before signing a loan agreement.
Collateral requirements
While some business loans are secured by collateral, others are unsecured. Unsecured business loans typically come with higher interest rates as they’re seen as more of a risk by lenders. On the other hand, choosing a secured loan instead can help you save money on interest — but you risk losing your property if you can’t keep up with your payments.
Collateral for a business loan generally consists of business assets, such as equipment or inventory.
Keep in mind: Many business lenders also require a personal guarantee. This is essentially a promise that you’ll repay the loan with your personal assets if your business defaults.
Which business loan should you choose?
The right business loan for you depends on your needs. If you want ongoing access to credit for everyday expenses, for instance, it could make sense to choose a business line of credit. However, if you want to invest in a project or finance a piece of equipment, a business term loan would likely be a better fit.
Keep in mind: If your business is new, your financing options might be extremely limited. In this case, you could consider short-term online loans, lines of credit or other forms of financing, such as business credit cards, invoice financing or even merchant cash advances.
Final verdict
Business loan rates have steadily increased since early 2022, and they’re anticipated to remain high through 2024. However, economists expect interest rates to start to decline toward the latter half of next year, albeit slowly.
So ultimately, what happens to business loan rates in 2024 will depend on the future monetary decisions of the Federal Reserve.
Frequently asked questions (FAQs)
In general, business loans and lines of credit from online lenders can be easier to get approved for compared to those from banks. For example, several online lenders accept poor credit scores, which could disqualify you from a bank loan. However, you’ll still need to meet certain requirements to get approved, such as being in business for a minimum amount of time and generating enough annual revenue.
You could also consider applying for a small business credit card, which doesn’t require you to have revenue or even an operating history. SBA loans might be another option. They’re considered less of a risk for lenders since the SBA will cover some of the debt if you default — which is why they tend to have less stringent qualifications. However, SBA loans also often require collateral and a down payment.
For established businesses, it’s often best to get business financing through a bank or credit union as they tend to offer the lowest interest rates and most flexible repayment terms. If you choose a lender that also offers SBA loans, you might have even more options to choose from.
For newer businesses, online lenders are often the best place to start looking for financing, since they generally have less stringent eligibility requirements.
The SBA guarantee fee is an upfront charge based on how much of your loan is insured by the Small Business Administration — 85% for loans of up to $150,000 and 75% for loans greater than that. As of November 2023, this fee ranges from 0% to 3.75%, depending on how much you borrow and the term of your loan.
Depending on the lender, you might be able to have the guarantee fee rolled into your total loan amount or have it deducted from your initial disbursement amount.
