The single biggest factor separating a good financing decision from an expensive one is understanding what you’ll actually pay — not the advertised rate, but the true effective cost. Rates vary enormously by loan type, and comparing them side by side makes the trade-offs much clearer.
Why «Interest Rate» Isn’t Always a Fair Comparison
Some lenders quote a traditional APR (Annual Percentage Rate), while others use a factor rate or a flat fee, which can look deceptively low at first glance. Always convert to an effective APR before comparing offers across different loan types or lenders — a «1.3 factor rate» and a «9% APR» are not directly comparable numbers without conversion.
Interest Rates by Loan Type
| Loan Type | Typical Rate Range | Rate Structure |
|---|---|---|
| SBA 7(a) loan | Prime + 2%–4.75% | Variable APR |
| SBA 504 loan | Fixed, below-market | Fixed APR |
| Traditional bank term loan | 7%–12% | Fixed or variable APR |
| Bank line of credit | 7%–19% | Variable APR |
| Online term loan | 10%–50%+ (effective) | Often factor rate |
| Online line of credit | 10%–60%+ (effective) | Often factor rate or flat fee |
| Invoice factoring | 1%–5% per invoice (annualized: 15%–60%+) | Factoring fee |
| Merchant cash advance | 1.1–1.5 factor rate (annualized: 40%–150%+) | Factor rate |
| Business credit card | 15%–29% | APR |
What Drives Your Actual Rate Within Each Category
- Personal and business credit score — the single biggest factor for most loan types, with stronger scores unlocking meaningfully lower rates.
- Time in business — longer operating history generally reduces perceived risk and lowers rates.
- Revenue and cash flow consistency — steady, predictable revenue supports better pricing than volatile or seasonal income.
- Collateral offered — secured financing almost always carries a lower rate than unsecured, since the lender’s risk is reduced.
- Loan term length — shorter terms sometimes carry lower rates but higher monthly payments; longer terms spread cost but often at a slightly higher rate.
Why Cheaper Isn’t Always Better
The lowest-rate option (SBA, traditional bank) also comes with the slowest approval process and strictest requirements. If a time-sensitive opportunity or urgent cash need means a 6-week bank approval isn’t realistic, a higher-rate but faster online lender may still be the right call — the true cost of missing an opportunity while waiting for approval can outweigh the extra interest paid.
How to Calculate the True Cost Before Committing
Beyond the headline rate, always factor in:
- Origination fees, often 1%–5% of the loan amount, added to your effective cost
- Draw fees or maintenance fees, common on lines of credit
- Prepayment penalties, which can offset the benefit of paying off a loan early
- Our full walkthrough on [how to calculate how much loan payment your business can afford] covers the math in detail.
Frequently Asked Questions
What’s the cheapest type of business financing overall? SBA loans generally offer the lowest rates among widely accessible financing, followed closely by traditional bank term loans for well-qualified borrowers.
Why do online lenders charge so much more than banks? Online lenders typically approve businesses with less credit history, lower credit scores, or less collateral than banks require, and price that additional risk into higher rates in exchange for faster, more flexible approval.
How do I compare a factor rate to a traditional APR? Convert the factor rate to an effective APR by accounting for the total repayment amount and the actual repayment period — many free online calculators can do this conversion quickly, and it’s worth doing before comparing any factor-rate offer to a traditional loan.
Conclusion
Interest rates vary dramatically across financing types — sometimes by a factor of 5x or more between an SBA loan and a merchant cash advance — so it’s worth converting every offer to a true effective APR before comparing. The cheapest option isn’t always the right one once speed, flexibility, and qualification requirements are factored in. For a full comparison of lenders within each category, see our guide on [best small business loans by lender].