Business Loan Interest Rate: Understanding Factors and Trends
In Singapore, the landscape of business loan interest rates is varied, with different banks offering a range of financing products.
Unsecured loans, which require no collateral, typically come with higher interest rates compared to secured loans, where collateral is pledged.
The effective interest rates (EIR) for various types of SME loans can fluctuate significantly, highlighting the importance of choosing the right financing option.

Moreover, government-assisted loan schemes have been introduced to enhance accessibility for SMEs, particularly following the challenges posed by the COVID-19 pandemic.
These loans often feature lower interest rates, making them an attractive choice for businesses, especially those with at least 30% local shareholding and registered in Singapore.
Understanding these options and carefully comparing them can help business owners find the most suitable financing solution for their needs.
Key Takeaways
- Interest rates for business loans vary significantly between different types and lenders.
- Government schemes can provide more affordable financing options for SMEs.
- Comparing loans thoroughly is essential to secure the best possible rates.
Effective Interest Rate (EIR)

The effective interest rate, often expressed as EIR, represents the true cost of borrowing money, particularly in business loans.
Typically, this rate provides a clearer picture of what borrowers will actually pay over the term of the loan.
Unlike the advertised nominal interest rate, which can be misleading, the EIR reflects all associated costs.
When looking at loans, the principal amount decreases each month as payments are made.
Initially, a significant part of each payment goes toward interest rather than reducing the principal.
This process results in an amortised cost based on the outstanding balance.
The formula for calculating the effective interest rate is:
EIR = (1 + (nominal rate / number of compounding periods)) ^ (number of compounding periods) – 1.
This calculation may confuse many small to medium-sized enterprise (SME) owners.
For instance, when presented with a 10% p.a. EIR for a loan amount of £100,000, one might assume their annual interest costs equate to £10,000. However, the actual interest paid in this scenario could be approximately £5,499.
To make things simpler for borrowers, financial institutions often disclose the nominal rate, also known as the flat rate.
In this example, the nominal rate correlating to a 10% p.a. EIR would be around 5.5% p.a.
Understanding the interest portion for the initial month can be done using basic calculations.
For instance, with a 10% p.a. rate divided by 12 months, the monthly interest portion on the £100,000 principal would be about £833.
For those who prefer speed and convenience, numerous online business loan calculators can assist in determining monthly instalments and total interest, alongside generating a detailed amortisation table to clarify loan repayment structures.
Difference Between Effective Rate and Simple Rate

Basic Interest Rate Calculation
The basic or flat interest rate represents a straightforward way to compute interest on a loan based solely on the original principal amount.
This rate, often termed the nominal rate, is generally expressed as an annual percentage and remains unchanged throughout the duration of the loan.
The formula for calculating simple interest is as follows:
Simple Interest = Principal Amount × Interest Rate × Time
For example, if the principal loan amount is £100,000, with an interest rate of 5% per annum over a loan period of one year, the simple interest would amount to:
- Principal: £100,000
- Interest Rate: 5% per annum
- Time: 1 year
Calculation:
Simple Interest = £100,000 × 0.05 × 1 = £5,000.
Comparing Simple and Effective Interest Rates
The primary distinction lies in how each type of interest treats the principal during the repayment period.
Effective rates factor in the diminishing principal balance that reduces as payments are made throughout the loan tenure. In contrast, simple interest applies the entire interest to the initial principal amount without amortization.
In Singapore, for instance, car loans often employ the flat interest method. However, effective interest rates are generally used for business and mortgage loans, calculated based on a monthly reducing balance, providing a clearer picture of the true costs involved in borrowing.
The Code of Advertising Practice requires banks to display the effective interest rate in the promotion of loan and credit products.
Additionally, some business loans may use a flat or simple rate approach, allowing small and medium enterprises (SMEs) to gauge average borrowing costs more easily.
Factors impacting quoted interest rates for business loans

Processing and administration fees
Lenders typically impose a processing fee to help cover the costs of loan origination and management.
It is essential to factor these fees into the overall cost of the loan.
For instance, if Bank A offers a lower interest rate than Bank B, the overall cost might still be higher if Bank A’s processing fee is considerably more.
Therefore, a thorough comparison of total financing costs, not just interest rates, is crucial.
Penalties for early repayment
Borrowers should examine whether their loan agreement includes a penalty for early repayment.
These penalties may affect a borrower’s ability to exit the loan arrangement and potentially reduce interest expenses.
Some financial institutions impose strict lock-in periods or heavy penalties, which can add additional costs.
Evaluating these conditions is key when assessing different loan offers.
Requirement for collateral
When considering a loan, it is important to determine if lenders need specific assets as collateral.
Secured loans that are backed by collateral generally come with lower interest rates compared to unsecured loans because they present less risk to the lenders.
Common forms of collateral may include fixed deposits, accounts receivable, or property. Banks usually require legal claims on these assets, which could also involve additional charges.
Interest rates for government-supported loans
SMEs should look into available government loan programmes, as these often feature more favourable interest rates when compared to traditional commercial loans.
Government schemes usually have risk-sharing arrangements with participating financial institutions, which helps decrease the overall cost of borrowing.
Interest rates for these schemes can fluctuate based on several factors, including changes in credit market conditions and the extent of government risk-sharing involved.
Additionally, each participating financial institution may have its own credit risk assessment criteria that influence interest rates.
Explore Various Loan Choices

SME owners should evaluate a broad range of bank loans to secure the most suitable financing.
It is essential to understand all terms and conditions in the loan agreement.
They might want to seek help from a loan consultant for expert guidance.
Using a loan assessment tool can provide immediate insights into the best financing options available, including those from DBS, OCBC, and Standard Chartered.
Frequently Asked Questions

What factors affect the interest rates for business loans?
Interest rates for business loans can be influenced by several key factors, including:
- Creditworthiness: The borrower’s credit history and score play a significant role in determining the rate.
- Loan amount and term: The size of the loan and the repayment period can impact the interest rate.
- Lending institution: Different banks and financial institutions may offer varying rates based on their policies and market positioning.
- Economic conditions: Changes in the economy, such as inflation and interest rates set by central banks, can also affect business loan rates.
How do interest rates for small business loans differ from those for startups?
Generally, interest rates for small business loans tend to be lower than those for startups.
This is often because established businesses have a proven track record and more stable cash flow.
Startups, being new and less certain, may face higher rates to compensate lenders for the increased risk involved.
What are the usual terms for business loans from major banks in Singapore?
Major banks in Singapore typically offer business loans with various terms, including:
- Loan amounts: Usually ranging from SGD 10,000 to SGD 500,000 or more.
- Repayment periods: Generally between 1 to 5 years, depending on the loan type and amount.
- Interest rates: Often ranging from 7% to 11% per annum, varying by lender and specific loan conditions.
How can one calculate repayments for a business loan based on the interest rate?
To calculate loan repayments, one can use the formula for monthly payments on an amortising loan. The formula is:
[ M = P \frac{r(1 + r)^n}{(1 + r)^n – 1} ]
Where:
- M is the total monthly payment.
- P is the principal loan amount.
- r is the monthly interest rate (annual rate divided by 12 months).
- n is the total number of payments (loan term in months).
Alternatively, many online loan calculators can simplify this process.
What is considered a competitive interest rate for a small business loan?
A competitive interest rate for a small business loan typically falls below the average market rate.
For many lenders, this might be around 7% to 9% per annum.
Rates significantly lower than this range can indicate favourable lending conditions, while rates higher than 10% may suggest less competitiveness or higher associated risks.
How frequently do interest rates on business loans change in the current financial environment?
Interest rates on business loans can fluctuate frequently, often in response to changes in the economy, including inflation and central bank policies.
It is common for lenders to review and adjust their rates regularly, making it essential for potential borrowers to stay informed about current market trends and rates.