From small business loans to government-backed schemes, each funding option comes with its own pricing, and knowing the average rates and what influences them can save you money. In this guide, we’ll explore the ins and outs of business loan interest rates in the UK, helping you make an informed choice.
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When it comes to taking out a loan for your business, understanding interest rates is a key step in deciding if it’s worth it. The business loan interest rate determines how much your loan will cost over time, which will affect your ability to repay and the amount you can borrow.
Borrowing costs have been especially volatile in recent years, as the Bank of England has raised baseline interest rates (more on those later) to combat inflation, making borrowing more expensive for many businesses.
A business loan interest rate represents the cost of borrowing funds from a lender, expressed as a percentage of the loan amount. It’s how lenders generate profit while compensating for the risk of lending. The most common way to see them discussed is APR - annual percentage rate.
Interest rates may be fixed (remaining constant over the loan term) or variable (changing with the market), and the rate you’re offered depends on factors such as your creditworthiness, loan type, and market conditions.
The average business loan interest rate in the UK varies widely based on the type of loan and the borrower’s financial profile. Here’s what you can expect:
For businesses seeking flexibility, business overdrafts or business credit cards may be an option, though rates can range from 7% to over 20% APR, making them a more expensive choice.
It’s also important to remember that interest rates aren’t everything when looking at the cost of borrowing. The length of the term, any fees involved and flexibility in when and how you repay can all affect the total cost of borrowing.
The type of loan you choose—secured, unsecured, or government-backed—has a significant impact on the interest rate.
Secured loans usually come with lower rates because they involve less risk for lenders. Conversely, unsecured loans are riskier for lenders, which is reflected in higher rates.
Both your personal and business credit scores are critical. A strong credit score can lead to lower rates, while businesses with poor credit may face higher costs or limited options. If you’re thinking of borrowing, then putting some work into building business credit can yield long term savings over the term of your loan.
For example, a business with excellent credit may secure a loan at 6%, while a similar loan for a business with poor credit could climb to 15%.
While it may seem unfair, some industries are perceived as higher risk by lenders. For example:
If your business operates in a volatile industry, expect lenders to charge higher rates to offset their risk.
The repayment term plays a crucial role. While longer-term loans may offer lower annual interest rates, they could result in higher total interest paid over time. Short term business loans will tend to have a higher interest rate, but since you’ll repay it over a shorter period of time, it may add up to a lower amount once all is repaid.
The Bank of England base rate, currently set at 4.75%, heavily influences borrowing costs across the UK.
The Bank uses their Base Rate as a means to control growth and inflation in the wider economy. When interest rates are low, borrowing is easier and less expensive, which incentivises companies to borrow and expand. This leads to higher spending from businesses and consumers, driving growth in the economy as a whole but also raising the cost of goods and services.
Changing the cost of borrowing is the Bank of England’s main tool for controlling inflation. When the Base Rate is higher, businesses and consumers are incentivised to save money and spend less, in theory driving down demand and inflation with it.
When rates go up or down, it leads to a knock-on effect throughout the economy, and while banks will vary their rates in order to compete with other banks, the general rule is that when the Base Rate goes up, general rates follow.
When choosing a loan, you’ll often need to decide between a fixed or variable interest rate. Here’s how they differ and why you might choose one or the other:
Fixed rates
Variable rates
The reality is that lenders hold most of the cards when it comes to business loan interest rates. However, there are steps you can take to improve your chances of getting a business loan at a favourable rate.
Lenders assess both your personal and business creditworthiness before setting an interest rate. To improve your chances of securing a low business loan interest rate, focus on:
The business loan market is highly competitive, with rates varying across banks, online lenders, and alternative finance providers. Comparing options is crucial to finding the best deal.
If you’re able to offer collateral, such as property or equipment, secured loans typically come with better rates.
Lenders are more likely to offer competitive rates to businesses with strong cash flow, a solid turnover, and a clear plan for growth.
A business loan interest rate calculator is an invaluable tool for estimating your loan’s cost. Here’s an example:
Using these figures, your monthly payment would be approximately £2,250, with total interest of £3,600.
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While comparing business loan interest rates is a key step in securing funding, it’s important to think beyond just the APR.
The total cost of borrowing depends on more than just the headline rate—it’s also shaped by factors like repayment terms, fees, and the flexibility of the loan. This is why over 90,000 businesses choose an iwoca Flexi-Loan.
Traditional loans often lock businesses into rigid repayment schedules and fixed borrowing amounts. With iwoca’s Flexi-Loan, you only pay interest on the funds you draw down, meaning you’re not paying for money you don’t need. This gives you more control over your finances, reducing unnecessary costs.
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The typical rate ranges from 6% to 15% APR, depending on loan type and borrower profile.
Secured loans generally offer lower rates (4%–20%) due to the reduced risk for lenders. Unsecured loans typically have higher rates (6%–15%).
Government-backed Start-Up Loans offer a fixed rate of 6%, making them one of the most affordable options for entrepreneurs.
