How do lenders set a business loan interest rate?

2 min read

Base + marginHow most rates are built

Risk-pricedMargin reflects your accounts

Per companyNo single 'advertised' rate

Reviewed at offerRate confirmed on a firm quote

The two halves of any rate

Almost every commercial rate has two parts. The first is the lender's own cost of funds — what it costs them to have the money to lend. The second is a margin added on top to cover the risk that a particular borrower might not repay, plus the lender's operating cost and profit. When you see one company quoted a lower rate than another for the same product, it is almost always the margin that differs, not the base.

Because the margin is set per borrower, there is no single 'business loan rate' the way there is an advertised mortgage rate. Two companies applying on the same day can be quoted very differently. See what counts as a good rate for how to judge a quote.

What moves the margin up or down

The margin is where your accounts do their work. Filed accounts showing consistent turnover and profit, a healthy debt-service coverage ratio, a longer trading history and a stable sector all pull the margin down. Thin filings, a first trading year, volatile revenue or a higher-risk sector push it up. Security — a charge over an asset or a personal guarantee — also reduces the lender's exposure and therefore the margin.

None of this is arbitrary. A lender is pricing the probability and cost of a default, and the margin is simply that estimate expressed as a percentage.

Why the product type matters too

The same borrower will be priced differently across products. A secured asset finance agreement is cheaper than an unsecured term loan because the asset can be recovered. A revolving credit facility may carry a slightly higher headline rate but you only pay for what you draw. Short-term working-capital products often quote a flat rate or factor rate rather than an annual percentage, which changes how the cost is expressed entirely.

When comparing offers, always convert to total repayable on the same drawdown and term so the underlying price is visible. The true cost of borrowing calculator does this for you.

How to get to a firm number

An indicative rate is only ever a starting point. The firm rate is set at offer, once underwriting has seen your accounts, bank data and — if relevant — the asset being financed. Strengthening any of the inputs before you apply is the most reliable way to lower it. See how to get a better rate for the levers, and the underwriting guide for what a lender actually looks at.

Ready to see your own numbers? Start an application with Credicorp — checking a rate does not commit you to borrow.

Frequently asked questions

Is the base cost of funds the Bank of England base rate?

Not exactly, though they move together. A lender's cost of funds is influenced by the Bank of England base rate but also by where it sources money — wholesale markets, deposits or its own capital. On a variable-rate facility your rate may be expressed as base rate plus a margin, in which case base-rate changes feed through directly. On a fixed-rate deal the base cost is locked in at outset.

Can I see the margin separately from the base?

On a variable facility the structure is often explicit — for example 'base rate plus 6%'. On a fixed-rate or flat-rate product the two are usually blended into one headline figure and not itemised. You can always ask, but the more useful comparison is the total amount repayable, which captures both parts and all fees in a single number.