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A Guide to Understanding Business Loan Interest Rates

Something that comes with almost every business loan, is the interest rate.

For many of us who have taken out personal loans such as mortgages, we will be familiar with how this works, and why knowing an interest rate is important for borrowers and lenders alike.

Here at Smart Funding Solutions, we work with many businesses providing pathways to the best business funding choices for them, and this includes choosing the right interest rate.

There is no set interest rate figure, and it varies with each loan, which can make this a hard subject to fully understand.

In this blog, we’re going to try and clear the waters, and provide insight into what an interest rate really is, and how to make sure you get one that works for you.

Let’s take a look.

happy business meeting

What Are Interest Rates?

Interest rates are essentially the cost of borrowing money.

They are expressed as a percentage of the principal loan amount.

This rate is how lenders make a profit from the loan and is a measure of the risk they take in lending you money.

If you are borrowing money from a funder or investor, this can be seen as the reward they get for parting with their money for the period of the loan.

There are two different types of interest rates:

Fixed Interest Rates

Fixed interest rates are exactly what they sound like – they remain constant throughout the life of a business loan.

This unchanging nature makes them a popular choice for those who value predictability in their financial planning.

Here’s what makes fixed rates appealing:

  • Budgeting Ease: Knowing exactly how much you need to pay towards your business loan each month makes budgeting repayments simpler and more reliable.


  • Protection from Market Fluctuations: Fixed rates shield you from the ups and downs of the market. Even if interest rates skyrocket elsewhere, your rate stays the same. A jump in interest rate could cause your business big issues if you haven’t planned to pay it.


  • Long-term Planning: They are particularly beneficial for long-term loans which is a popular choice for many businesses. Consistent payments help in long-term financial planning and can play a big part in business plans.

Variable Interest Rates

In contrast to fixed rates, variable interest rates change over time.

These rates are typically pegged to an index or a benchmark rate, like the prime rate or a central bank’s rate, and will fluctuate as these benchmarks do.

The variability of these rates introduces both potential benefits and risks:

  • Potential for Lower Rates: If market rates decrease, so will your interest payments. This can be particularly advantageous in a declining rate environment.


  • Flexibility: Variable rates often come with more flexible terms. For example, some variable-rate loans may allow you to make extra payments without a penalty, or not pay as much back at certain points of the year when business may be slower.


  • Rate Caps: Many variable-rate products include caps that limit how much the interest rate can increase over a specific period, or over the life of the loan, providing some measure of protection against big rises.

people working out interest rates on laptop

Factors Influencing Interest Rates

Several factors can influence the interest rate on your business loan, including:

The Base Rate

The base rate set by the Bank of England is a critical factor.

It influences the cost of borrowing if you are lending from a bank, which in turn affects the interest rates they offer to businesses.

When the Bank of England raises its rate, borrowing generally becomes more expensive, and vice versa.

The Bank of England adjusts its base rate partly in response to inflation to maintain economic stability. Higher inflation often leads to higher interest rates to counter the devaluation of currency.

Economic Conditions

The overall health of the UK economy plays a role.

In times of economic growth, interest rates might increase to prevent the economy from overheating.

During a downturn, rates might be lowered to stimulate borrowing and investment.

This makes it extremely important to get a loan at the right time, or else you may be stuck with a high interest rate that you could have avoided if you took the loan at a different time.

Credit Risk

The creditworthiness of a business significantly affects the interest rate it will be offered.

Businesses with strong credit histories and solid financials are likely to secure loans at lower interest rates, as they represent a lower risk to lenders.

This makes building a strong score important as it can save you money when taking out a loan. We can provide a credit insight report for your business which will take a deeper look into your score and provide ways to improve it.

Of course, a bad score doesn’t mean getting a loan is impossible as there are bad credit options available, but they do often come with higher rates.

Loan Terms

The structure of the loan itself, including its duration (short-term vs. long-term) and whether it is secured or unsecured, can influence the interest rate.

Generally, longer-term loans and secured loans (those backed by collateral) might have lower interest rates.

While the interest rates on a long term business loan may be lower, you do pay it back for longer and therefore may still end up paying more, so it is always a good idea to calculate full repayments before signing a contract.

Market Competition

The level of competition among lenders in the UK also impacts interest rates.

More competition can lead to more favourable loan terms and lower interest rates as lenders strive to attract business clients.

If your business is in a healthy position with a strong plan in place for future growth, then this will greatly appeal to lenders who will be willing to lower the interest rate as there is much less risk.

financial meeting

How to Negotiate Better Interest Rates

As we’ve mentioned in this blog, interest rates aren’t set in stone, and they can be negotiated. Here are five steps to ensuring you always get the best terms.

  1. Improve Your Credit Score: As mentioned above, a higher credit score indicates lower risk to lenders and can significantly influence the interest rate offered. There are many ways to improve your score, including paying your bills on time, reducing outstanding debt, and rectifying any errors on your credit report to improve your credit score.


  1. Research and Compare: Before negotiating, research the current market rates for the loan type you’re seeking. Use online comparison tools to see what various lenders are offering. This knowledge equips you to negotiate more effectively.


  1. Demonstrate Financial Stability: Show evidence of a stable revenue stream for your business, a strong business plan and solid financial management. This can convince lenders that you’re a low-risk borrower.


  1. Ask Directly and Confidently: Sometimes, simply asking for a better rate can work, especially if you have quotes from other lenders as leverage. Be polite but assertive in your request.


  1. Use Professional Assistance: If you’re not comfortable negotiating on your own, consider using a broker or a financial advisor who can negotiate on your behalf and use their expertise and network to always find the best rates for you.

happy business meeting

Smart Funding Solutions

Navigating the world of business loans and interest rates doesn’t have to be overwhelming. By understanding how interest rates work and what they mean for your loan, you can make more informed decisions, ensuring that your business loan serves as a stepping stone to success rather than a financial burden.

Remember, the key is not just to find a loan but to find the right loan for your business needs.

Want to know more, then why not get in touch with our team or apply for a loan with Smart Funding Solutions today?

Our expert advisors can provide guidance and options that always leave you with the best repayments for your situation.

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