What determines the interest rate on a business loan?

Originally Written in Dec 2024 as part of the Holiday Advent Series – The Nice List.

The interest rate on a business loan is based on a variety of factors including the personal credit history of any directors, the trading history and cash position of the business, the existence of business assets and the type of credit required. Annual Flat Rates themselves can vary as broadly as 5% to 30% depending on the individual situation and the type of credit required.

Here we go into detail about how the rate is affected and give you some examples of recent rates we obtained for our customers

Business Loan Interest Rates

We are all ‘Anchored’

When it comes to interest rates, every 6 weeks we hear about the Bank of England Base Rate, which many of us then remember. If we think about mortgages, we expect the rate to be somewhere near the base rate. Considering car finance, we would perhaps add a few percent. The psychological effect of these numbers is called ‘anchoring’. A number is implanted in your mind and all subsequent rates are then compared to it, whether that’s justified or not.

Any interest rate you will be offered is based on risk. Mortgage rates are low because if you fail to pay, selling the house will likely cover the loan and the house is a solid asset. Car finance might be a bit higher. But again if you default on a loan, the car can be repossessed and cars retain a good amount of value, subject to usage. So, if interest rates are based on risk and security, how do we determine the rate on a business loan?

7 Key Factors Affecting Business Loan Rates

Portman works with a wide range of lenders and can help source funding for all types of projects as well as businesses in varied situations. We search our panel of lenders to best suit the needs of our customers at favourable rates.

The list below does not necessarily mean a business would not be able to obtain finance, merely that the rate could be higher or lower.

Alfie Toseland, Commercial Finance Broker at Portman lists his top 7 factors that influence the rate his customers receive:

1. Directors’ personal credit

Often the main factor with most lenders is the personal credit rating of the business directors through companies such as Experian. If a director has defaulted on previous loans, has high levels of personal debt, or has been declared bankrupt this is likely to increase the rate.

2. Business credit rating

Just like people, your business has a credit rating too. Created by businesses such as Creditsafe, lenders refer to this when making an offer of credit. If your business has any previous missed payments or defaults, has high levels of debt, have frequently been rejected for credit, typically pays its suppliers late, or has a short trading history, all these affect your credit rating and a lower rating means a higher interest rate.

3. Affordability

A finance agreement typically results in a monthly repayment figure. When that figure is compared to your bank statements, lenders assess whether its reasonable for you to make that repayment. This has a bigger effect the amount you will be offered than the rate itself.

4. Are any Directors a homeowner and what’s the equity position?

Property offers the best security for a lender because it rarely loses value in the long term. Often in the form of a ‘Personal Guarantee’, this is likely to secure better interest rates for a loan. Particularly true if a large part of the mortgage is paid off.

However, there are alternatives. Portman can source funding that does not require a personal guarantee. We can also source loans where a business debenture can be provided instead. You can always call us to discuss your options on this one.

5. The bank statements

Closely linked to affordability, does your business have the free cash to cover monthly payments or do you constantly run into your overdraft? Is your cashflow predictable and consistent? Good financial management is an indicator of a well-run business, therefore one more likely to thrive after receiving credit. As a result, these businesses are a safer bet and are likely to obtain lower rates.

6. Current exposure

How much debt you already have affects your credit rating as well as your ability to repay. It may also mean that security has also been placed on business assets already so any subsequent lenders carry greater risk of being the one that doesn’t get paid in the event of a problem.

7. Type of credit required

Different types of funding typically attract different rates, though each do result in a wide range of rates. Asset finance for a piece of machinery that holds its value over time tends to offer the best rates. Short-term cashflow loans for smaller or riskier businesses tend to result in higher rates.

Bear in mind: how soon a loan is repaid has a great effect on the total interest payable, which can mean short-term loans with higher interest rates are cheaper than long-term loans at lower rates.

What Suggests A Business Is Unlikely To Get Finance?

If a business is in one or more of the situations below, it can be much harder to obtain finance

• Unsettled CCJs
• A combination of issues resulting in the lowest credit band
• Loss making business or very low monthly balances in the bank statements
• No business or personal assets
• Previous history of liquidating and/or phoenixing businesses

Portman can help

As a specialist lender and broker, we offer our own funding as well as use our panel of over 45 specialist lenders to support the needs of our customers. Whether you believe you have the strongest credit rating or your trading history is more complex, get in touch and we will source rates tailored to your needs and situation.

Written by Saul Michelson

Head of Marketing

Degree and Post-Grad qualified with 23 years business-to-business experience, Saul is a well-rounded senior professional. A previous winner of Marketing Week’s ‘Best B2B Campaign’ award and two Construction Marketing Awards, Saul enjoys finding out what makes businesses tick and writing articles that get straight to the point.

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