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.

16 June 2022

What is an interest rate?

Interest refers to the amount of money that a lender charges a borrower to take out a loan with them. The borrower must pay this amount on top of the loan amount they’ve taken (the principal). It will be displayed as a percentage of the loan: the interest rate.

You calculate the interest rate by dividing the interest amount by the principal loan amount. It represents the cost of borrowing money. For example, let’s say that a business borrows £10,000 over 12 months with an interest rate of 5%. The total interest rate repayment would be £500, with monthly payments of £41.67 - taking the total amount to £10,500.

How do interest rates in 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, and the borrower's credit history.

Lenders usually provide loan interest rates using annual percentage rate (APR). The APR interest rate is the annual percentage rate, which is the interest rate charged on a loan, expressed as a yearly rate. It is important to note that not all lenders use APR when advertising their rates; some may only list the nominal or base rate.

Using APR is also not always the best way to compare different loans. This is because loans aren’t usually repaid in full with interest at the end of the agreement - meaning that the total cost of the loan is not reflected. This is because it doesn’t always reflect the total cost of the loan as borrowers usually make repayments across weekly or monthly instalments instead of one full payment at the end of the year with interest included. We discuss APR in more detail in our support article, including the difference between APR and the total cost of credit.

At iwoca, our Flexi-Loan has a representative interest rate of 3.33% per month, with no fees and interest only charged on the amount you borrow and for each day you have your loan.

Types of business loan interest rates

There are three types of business loan interest rates in the UK: fixed, variable, and discount.

Fixed interest rates remain the same for the entire term of the loan. This gives borrowers a level of certainty as they know exactly how much they will be paying each month.

Variable interest rates can change either monthly or yearly, depending on the terms of the agreement. This means borrowers could see their payments rise or fall depending on market conditions.

Discount interest rates are a type of variable rate where the amount paid each month or year is lower than the actual interest rate the bank is charging. 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 are business loan interest rates calculated?

Banks calculate UK commercial loan interest rates using a margin over the base rate set by the Bank of England. This means that as the Bank of England changes its base rate, commercial lenders will adjust their margins and their interest rates. Meanwhile, alternative business providers like iwoca have unique methods of calculating interest rates for business customers that apply for a loan.

Lenders calculate business loan interest rates using several different factors. Their main consideration will be the risk of lending to a particular business. This means that companies with a strong credit rating will usually secure lower interest rates on their loans than businesses with a weaker credit rating.

Other factors that lenders look at include the amount of money you're borrowing, the length of time you will take out the loan, and the loan's purpose. Generally, businesses can expect to pay a higher interest rate on short-term loans than they would on long-term loans.

How to calculate business loan interest:

Lenders often present interest rates on a business loan differently. While some use annual percentage rate (APR), we share the total cost of credit. For example, if you wanted to borrow £10,000 over a six month period then the total repayment would be £11,197 based on our representative interest rate of 3.33% (actual rate may vary). For a personalised amount, you can use our business loan calculator.

How to compare business loan interest rates?

When considering a business loan, it’s important to understand how the interest rate works, and remember that the interest rate is only one part of the overall cost of borrowing money.

Be sure to ask about any fees associated with the loan and compare them between different lenders before making a decision. Interest rates can vary significantly from one lender to the next, so it’s vital to shop around and compare business loan interest rates before deciding.

Additionally, some lenders may offer lower interest rates but charge higher fees for early repayments or missed payments, so it’s important to conduct due diligence before applying for a loan.

Want a business loan with flexible terms and a decision within minutes? Why not apply for iwoca's Flexi-Loan? You can borrow up to £500,000 over 24 months, and there are no penalties for early repayments.

Find out more and apply for a Flexi-Loan today.

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Charlotte is a Senior PR & Communications specialist at iwoca. She's been sharing news and insights about the finance industry for over three years.

Article updated on: 16 June 2022

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