Understanding business loan interest rates

Understanding business loan interest rates


min read

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What is a business loan interest rate?

An interest rate is the amount a lender charges a borrower for a loan. The loan is termed the ‘principal’, and the interest rate is the additional amount the borrower must pay to receive the loan. 

In other words, it’s the cost of borrowing money. The interest rate will be a percentage of the loan and must be repaid during the lifetime of the loan. The total sum repaid at the end of the loan will be the amount loaned plus the interest on top. 

What are the different types of business loan interest rates?

There are three types of business loan interest rates in the UK: 

Fixed interest rates

Fixed interest rates which remain the same for the entire term of the loan, so borrowers know exactly how much they will pay each month. 

Variable interest rates

These can change monthly or annually, depending on the terms of the agreement. It means payments could rise or fall with changing market conditions.

Discount interest rates

These are a type of variable rate where the amount paid each month or year is lower than the bank interest rate. This is because the lender is offering a ‘discount’ for borrowers who agree to have their interest rates increase or decrease along with the general market rate.

How do interest rates on business loans work in the UK?

Business loan interest rates in the UK vary depending on the size and type of the loan, the lender, the borrower's credit history, and the nature of the business and its performance. 

Lenders usually provide loan interest rates based on the annual percentage rate (APR), which means the interest rate for a whole year. The calculation is made on the basis that you borrow the full amount and keep it for the whole year, paying back the loan plus interest at the end of the term. Not all lenders advertise their rates but they must disclose the rate before you sign a loan agreement. 

APR can be confusing, so we’ve created a separate guide to APR that explains how it works. Always check the terms and conditions and remember that the APR isn’t necessarily the best way to judge the true cost of a loan. This is because loans aren’t usually repaid in full with interest at the end of the term. Borrowers normally make payments in weekly or monthly instalments, not one overall payment with interest at the end of the year. 

For example, iwoca offers a Flexi-Loan with a representative rate of 3.33% per month. For a 12 month loan, there are no fees, and interest is charged only on the amount you borrow and for each day that you have the loan. There is no charge for early repayment and if you do pay early, you avoid the increased cost of interest payments that would have been due over the full term.


What does ‘representative’ mean? 

When you see the word representative next to a business loan it means that at least 51% of new borrowers will be offered this rate. 

However, be aware that this doesn’t mean that the lender you spot with the lowest representative will give you the best rate. When you apply, you will usually receive an APR that reflects your personal and business circumstances. It could be higher, lower, or the same as the representative APR.

What would my interest rate be?

Here’s an example of the interest payments on a business loan over a year. Imagine you’re a retailer who takes out a £60,000 loan for 12 months at an interest rate of 1.95% per month, beginning in September 2023 and completing in August 2024.

Alternative lenders like iwoca often have unique ways to calculate the interest rate for a business loan

With a Flexi-Loan, iwoca charges interest only on your outstanding balance for the days you’re using the business loan. Rates start at 1.95% a month for a Flexi-Loan, depending on your business.

What is the average interest rate on a UK business loan?

The type of loan or finance, repayment terms, market forces and competition are just some of the factors that affect the interest rate on a business loan. Because interest rates can vary significantly, it’s difficult to be precise about an ‘average’ business loan interest rate. At the time of writing, the base rate is 5.25%, which is high compared with the very low figures in recent years. For example, the base rate fell to 0.1% in 2020 – the lowest business loan interest rate on record.  

How can I get a better interest rate on a business loan? 

Because interest rates can vary so much, you need to research the market and dig deep. It’s important to realise that if you’re shopping around based on the representative APR, the actual rate you receive will be based on your personal circumstances. 

The representative APR is a helpful comparison tool, but it doesn’t guarantee the rate you’ll receive – and remember that other fees may apply. Some lenders will offer lower interest rates but charge higher fees for early repayments, missed payments or late payments.  

Other ways to potentially secure a better rate include:

  • Clearing any outstanding debts before applying for a loan
  • Offering a personal guarantee
  • Providing a business asset as a guarantee
  • Correcting any errors on your credit rating that could 
negatively impact your score

If you want a business loan with flexible terms and a decision within minutes, try iwoca. Our Flexi-Loan allows you to borrow up to £500,000 over 12 months with no penalties for early repayments. Find out more and apply for a Flexi-Loan today.

Article published on
January 24, 2023
Last reviewed on:
May 16, 2024

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Understanding business loan interest rates

Interest rates can vary significantly between lenders and products. It’s sensible to compare different business loan providers to understand how the interest rates will affect your monthly payments and overall costs.

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