When seeking a business loan, you need to consider various components, such as how long it takes to apply and get a funding decision, repayment structure and flexibility and whether you need to provide assets as security. But another key element is interest, and how this affects your overall cost of borrowing. 

In this article, we look at how business loan interest rates work, how they’re applied and what factors influence the rates lenders offer.

What is a business loan interest rate?



Your business loan interest rate is the amount a lender charges you during the lending period. The loan itself to be repaid is called the ‘principal’, and the interest rate is the additional amount a borrower must pay on top of the principal during the repayment schedule (or sometimes at the end, in an agreement where interest is ‘rolled up’).

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 main types of business loan interest rates in the UK:

• Fixed-rate interest – your rates remain the same for the entire term of the loan, so borrowers know exactly how much they will pay each month. 
• Variable-rate interest – these rates can change monthly or annually, depending on the terms of the agreement, meaning payments can rise or fall with changing market conditions.
• Discount rate interest – a type of variable rate where the amount paid each month or year is lower than the bank interest rate, due to the lender 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. Some lenders don’t advertise their interest rates upfront, due to the level of variance, while others provide a representative APR, meaning at least 51% of those applying will be offered this annual figure.

So, how do lenders set/calculate the rate? Let’s start by looking at the factors they use to determine the rates they offer.

Key factors that affect business interest rates

Here are the main factors that impact business interest rates offered by lenders:

• Business financial health: Lenders assess revenue, profit margins and cash flow stability when determining loan offerings.
• Credit score and history: A higher business or personal credit score typically leads to lower rates due to reduced lender risk.
• Loan amount and term: The size of the loan and the length of borrowing are two interlinking factors that affect rates, as lenders assess affordability over the term length. While a longer term typically lowers rates, a higher loan amount adds risk, as the company’s financial situation and market conditions can change over time. 
• Collateral/security: Secured business loans (backed by assets) usually attract lower rates than unsecured ones, as lenders can claim assets to recoup any missing payments if businesses default on the loan.
• Industry risk: Some industries are considered higher risk, e.g., hospitality, construction, etc., which can increase business interest rates, or in some cases, rule the business out completely. 
• Economic conditions: Market interest rates, inflation, government policies and Bank of England (BoE) decisions on interest rates can directly affect business loan rates.
• Lender type: Banks, credit unions, online lenders and alternative finance providers each price loans differently, with banks often offering lower rates but stricter eligibility criteria and requirements.

Important business interest rate components to understand

Below, we’ve outlined some of the main components of business interest rates you need to know about and consider when choosing a loan provider:

APR (annual percentage rate)

Lenders usually provide loan interest rates based on the 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, repaying the loan plus interest at the end of the term. APR isn’t necessarily the best way to judge the true cost of a loan, as most loans aren’t repaid in full with interest at the end of the term. Borrowers normally make payments in weekly or monthly instalments.

Not all lenders advertise their rates, but they must disclose the rate before you sign a loan agreement.

Representative rate

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 the lender with the lowest representative rate 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.

Monthly rates

Instead of quoting an annual rate, some lenders present interest as a monthly rate (particularly loan agreements like bridging loans or other shorter-term lending solutions). For example, a 1% monthly rate may sound small, but it translates to around 12% annually (and more when compounding is involved).

Compounding

This is how often interest is applied to the outstanding balance of a loan. With ‘simple interest’, you only pay interest on the original amount borrowed. With ‘compound interest’, interest is charged on both the principal and any accumulated interest from previous borrowing periods. Compounding over time leads to a higher overall cost of borrowing.

Effective interest rate (EIR)

Sometimes lenders present the EIR to show the true cost of borrowing, accounting for compounding and timing of repayments.

How rates are calculated

Business loan rates are calculated based on risk assessment, market conditions, and the influencing factors mentioned above. The interest rate can be fixed (staying the same throughout the term) or variable (changing with market interest rates, such as the BoE base rate or other benchmarks). Some loans use simple interest, while others use compound interest methods, so consider both the interest rate and any fees when determining the cost of borrowing. 

What is a good business loan interest rate?

A ‘good’ business loan interest rate is difficult to define, as rates can vary widely depending on factors such as the loan type and term, your credit and risk profile, and the features offered by lenders (e.g., flexibility, speed of access, and whether assets are required as security).

For example:

• Short-term loans usually have higher rates than long-term loans, because the lender needs to recoup costs quickly.
• Secured loans generally come with lower rates than unsecured loans, as the lender’s risk is reduced when assets are used as collateral.

In the UK, typical business loan interest rates often fall between 5% and 20%, with lower-risk businesses accessing rates closer to the BoE base rate. Essentially, what constitutes a good rate can depend on your financial position, creditworthiness and how the loan compares with alternative funding options, in terms of suitability and affordability. Always consider the total cost of borrowing. 

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What is the average business loan interest rate?

As interest rates can vary significantly, due to the different types of loans, repayment terms, risk levels and market conditions at play, an ‘average’ business loan interest rate can be misleading. However, most secured business loans from banks offer interest rates from around 6%, while unsecured loans and short-term loans, often provided by private lenders, are usually higher. Many lenders and brokers consider 8%–12% a typical range for average business borrowers.

As mentioned, the BoE base rate influences the rates lenders can provide. At the time of writing, the Bank of England reduced its base rate from 4.25% to 4%. As this changes over time, the average business loan interest rate will also change.

Learn more about the differences and pros and cons of getting a business loan from a bank vs. alternative lenders. 

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



Due to interest rates varying so much, you need to research the market and compare various financial lenders and their loan solutions. It’s essential to understand that if you’re comparing rates based on the representative APR, the actual rate you receive will depend 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 apply. Some lenders offer lower interest rates but charge higher fees for early repayments, missed or late payments.  

Other ways to potentially secure a better rate include:

• Clearing any outstanding debts before applying for a loan
• Offering collateral or a personal guarantee which lowers your risk level to lenders
• Correcting any errors on your credit rating that negatively impact your score

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Interest rates for long-term vs. short-term loans

Long-term loans generally come with lower interest rates compared to short-term loans. They often require collateral and a stronger credit profile, but provide more stability and predictable repayments.

Short-term loans are often unsecured (unless a bridging loan and short-term property finance agreement) and usually have higher interest rates due to a greater lender risk. The trade-off is that short-term loans give businesses quicker access to funds and greater flexibility.

Consider the total cost of borrowing

It’s important to remember that a lower interest rate doesn’t always mean a cheaper loan overall. The total cost of borrowing depends on a combination of factors, not just the advertised rate. 

• Secured loans typically have lower rates but can carry additional fees, such as valuation, legal or arrangement fees linked to collateral. While unsecured loans usually come with higher interest rates, they often offer more flexibility, fewer upfront fees and potential options to repay early without a penalty.
• Spreading repayments over a longer period may reduce monthly costs but increase the total interest paid, and compounding effects can also make a loan more expensive over time, even if the advertised rate is attractive.

So, while a significantly lower rate is attractive, the combination of fees, repayment period and interest structure may make another loan more cost-effective. Focus on the total cost of borrowing to get a clearer picture when comparing finance options.

Business loan interest calculator 

Many lender websites have business loan calculators to help you understand how interest rates, amount borrowed and term length will affect your repayments. Some incorporate fees to predict the overall cost of borrowing. Using tools like loan calculators will help inform your business loan selection.

Why not use iwoca’s business loan calculator? See how much you can borrow, for how long and what your likely repayments will be.

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With iwoca’s flexible business loans, you’ll only pay interest on the amount you draw down, and there’s no charge for early repayment. So, if your circumstances change, you’ll avoid unnecessary interest payments and costs of borrowing.

Find out how to get an iwoca business loan. You’ll get a funding decision within 24 hours, with successful applicants gaining access to funds on the same day.