Business loans are a powerful tool for helping companies of all sizes reach their full potential. Funding can be used for many reasons — from investing in cutting-edge equipment that will drive sales and reduce costs, to expanding by hiring new employees and entering new markets.
A line of credit can also improve the health of a business. Cashflow is crucial for ensuring suppliers and other financial commitments are paid punctually, but businesses working on large contracts may need flexibility before client invoices are settled.
But what are the types of finance on offer in the market today? What influences the average business loan interest rates in 2024? How can you access more competitive deals?
Here, we'll explain everything you need to know.
The factors driving interest rates
Just like with personal finance products including mortgages and credit cards, the cost of borrowing is determined by the Bank of England's base rate.
At the time of writing, this stands at 5.25% following 14 consecutive rises in an attempt to bring down inflation. Cuts are expected later in the year, which would make business loans cheaper, but officials have warned this won't happen until there are clear signs of economic improvement.
Typically, financial institutions add a premium on top of the base rate — meaning that, realistically, the cheapest business loans on the market will still have an APR of 6%. The actual figure your startup or company is offered will depend on a few factors, including:
- Your business credit score: The rating runs from a scale of 1 to 100 — and the higher your company's score, the higher your creditworthiness. Factors include whether the business has a solid track record of paying bills on time, has fully and punctually filed its tax returns and whether there have been any insolvency proceedings in the past. Improving this rating means you'll be regarded as a lower-risk applicant by lenders, opening the door to larger loans at lower rates.
- Current levels of debt: Of course, some business loans are taken out with the sole purpose of consolidating existing debt. But companies with a high amount of liabilities may find it harder to access credit on competitive terms. As a result, attempting to pay down outstanding financial obligations before making an application can help.
- Secured versus unsecured loans: Cheaper interest rates are offered for secured business loans. This is where your company offers some form of collateral in the event of non-payment — such as vehicles, expensive machinery or property. As the name suggests, unsecured loans don't come with such obligations. However, company directors may be obliged to sign a personal guarantee that declares they'll be liable for repayments if something goes wrong.
- Your bookkeeping: Maintaining separate accounts for your business and personal finances is crucial — no matter how small your operation is. During the application process, this makes it easier for underwriters to assess the health of your company. They'll be looking to see whether there is more money coming in than going out, regular income streams from long-standing clients, and no signs of financial distress.
- How much is being borrowed: Some providers, such as HSBC, offer lower rates for higher levels of borrowing. For example, while a loan of under £10,000 would command a representative APR of 11.3%, this would fall to 7.1% for loans of £10,001 and above. Others charge a fixed fee irrespective of what's borrowed.
Also Read: 11 Best Business Loans for Small Businesses in 2024
Four common types of business loans
Small and medium-sized enterprises should also take time to explore which type of business loan best matches their needs.
Eligibility can depend on a multitude of factors including the industry you're in, current turnover, and how the finance will be used. Here are the most common types of business loans in the UK:
- Start-Up Loans: The British government allows entrepreneurs to borrow up to £25,000, with a fixed interest rate of 6%, if they're looking to begin or grow a business. Credit and affordability checks are part of the process — as well as demonstrating that there is sufficient demand for the goods and services you plan to offer.
- Business loans: Usually offered by high street banks and online lenders, these products are geared towards companies that are already established. Some providers offer loans of up to £15m or more, with repayment terms of anywhere from one month to 20 years. You may need to hit a minimum level of turnover or have been trading for a certain period of time, to be eligible. Benefits of this approach can include same-day decisions, with funds wired to your account in under 24 hours. You'll normally be given an estimated annual percentage rate once an eligibility check is completed. (Note: specialist lenders also cater to specific industries, such as hospitality.)
- Invoice finance: One of the biggest sources of stress for small businesses can be clients who pay weeks later — or fail to settle their bills on time. Official figures show average payment times currently stand at 35.6 days, and in 25% of cases, transactions aren't completed on the agreed terms. While all of this is happening, your company will still be expected to pay staff, utility bills and suppliers regularly. This is where invoice financing comes in. Here, you can receive a large proportion of the money that's owed in advance, and the lender becomes responsible for collecting the payment.
- VAT loans: As of April 2024, the threshold before small businesses need to pay value-added tax stands at £90,000. But on certain occasions, these bills to His Majesty's Revenue and Customs can come as a financial shock, or at an inconvenient time. VAT loans are a short-term solution that allows this legal obligation to be covered without interrupting current business operations. A lender would directly settle what's owed with the taxman, with the business repaying this bill on a monthly basis.
What are current business loan interest rates?
| Loan type | Approximate cost |
| Startup Loans | 6% APR |
| Business loans | 7% to 15% APR |
| Invoice finance | 6.75% to 8.25% APR |
| VAT loans | 0.9% per month |
| Crowdfunding | 5% to 10% fee |
| Overdrafts | 11.5% to 19.9% EAR |
What are the alternatives?
Financial institutions offer overdrafts and credit cards to businesses, but such types of credit should only be used as short-term solutions because they command much higher interest rates.
There are alternative ways of securing financing for your business. One of them is peer-to-peer lending. Here, you complete a form that outlines how much money your business needs to borrow — as well as your desired terms. You'll then be matched with approved investors who are willing to offer you the capital.
Such loans can charge a premium compared with products from mainstream banks, and there may be other costs like completion fees to consider. Crucially, you will retain full control of the company.
For businesses about to embark on a phase of rapid growth, equity finance is another option. Here, you would be giving a stake in the company to an external investor — and as a result, they'd receive a share of the profits.
Typically, such arrangements are about more than money. That's because angel investors offer mentorship, open doors to new opportunities, and may have a personal passion for what the business offers.
In recent years, many entrepreneurs have also gone directly to consumers through crowdfunding. This is where accredited investors, and individuals, can snap up shares in your business.
There will be regulations that need to be considered if you're hoping to raise a substantial amount of money. It can also take a lot of time and effort to drum up interest in a campaign — with no guarantees that your financial goals will be met.
Will business loan interest rates come down?
Even a modest drop in the Bank of England's base rate can have a huge difference on business loan repayments.
However, most current borrowers won't see any benefit if rates are cut because they'll be tied into their current APR for the rest of the term.
When the Bank begins to lower rates once again, these savings will eventually trickle through to the products that are on the market. Lenders also take forecasts into account when setting their rates.
Analysts are split on what the future holds, primarily because of high levels of uncertainty at the moment. Capital Economics recently predicted that the base rate could fall to lows of 3% by the end of 2025, but these estimates are evolving on a regular basis.
Our conclusion
Irrespective of whether you're a one-man band or a growing enterprise with multiple employees, there's a business loan out there for you.
However, it's important to crunch the numbers to ensure this new financial commitment would be affordable — especially if trading takes a turn for the worse. Comparing the products on offer can help you save money on repayments, all while boosting the chances of getting accepted.
A strong business plan, well-organised financial statements, collateral and healthy demand are all factors that'll help you unlock the best deals on the market — as well as a professional website and social media presence. Given how lenders will perform in-depth due diligence during the application process, you'll want to make a good impression.
