Commercial loan interest rates can materially affect a business’s cash flow, investment return and long-term borrowing cost.
However, the advertised rate rarely tells the whole story.
Commercial lenders assess each application individually. They consider the property, borrower, business performance, deposit, loan term and proposed use.
Therefore, two businesses borrowing the same amount could receive very different terms.
At a Glance
Commercial loan interest rates are usually based on a reference rate plus the lender’s margin.
The final rate may depend on:
- The property type and condition.
- The loan-to-value ratio.
- Business income and trading history.
- The borrower’s credit profile.
- The strength of the repayment plan.
- The loan term and repayment structure.
- Whether the rate is fixed or variable.
- Arrangement, valuation and legal fees.
The lowest interest rate is not always the lowest-cost option. Borrowers should compare the total borrowing cost and associated conditions.
Commercial loan interest rates in July 2023
This article was originally published in July 2023.
The Bank of England increased Bank Rate to 5% on 22 June 2023. It later increased to 5.25% on 3 August 2023.
These increases affected funding costs throughout the financial market.
However, Bank Rate was not the only factor affecting commercial pricing. Lenders also considered their funding arrangements, operating costs and appetite for different risks.
You can review the historical movements through the Bank of England Bank Rate database.
Commercial rates were not usually displayed through one universal pricing table. Most lenders priced each application after assessing its individual characteristics.
What is a commercial loan interest rate?
A commercial loan interest rate is the percentage charged for borrowing money for a business or commercial property purpose.
Commercial borrowing can include:
- Purchasing business premises.
- Refinancing existing commercial property.
- Buying an investment property.
- Raising funds against business property.
- Funding equipment or working capital.
- Supporting a property development.
- Completing a time-sensitive purchase.
A commercial mortgage is normally secured against land or property.
By contrast, business loans may be secured or unsecured. Their pricing and repayment terms can differ.
Understanding this distinction matters because lenders assess each product through different risk models.
How are commercial loan rates calculated?
Commercial lenders commonly calculate a rate using two parts:
Reference rate + lender margin = payable interest rate
The reference rate may follow Bank Rate, a lender’s standard variable rate or another recognised funding benchmark.
The lender margin represents the additional percentage charged for the assessed risk and commercial return.
For example:
- Reference rate: 5%.
- Lender margin: 3%.
- Total variable rate: 8%.
This is only an illustration. Actual pricing depends on the application and lender criteria.
A quoted margin may appear competitive. However, the overall cost can change when fees and repayment conditions are included.
Fixed commercial loan interest rates
A fixed rate remains unchanged for an agreed period.
This can help a business forecast its monthly expenditure. It can also reduce exposure to rising reference rates.
Potential advantages include:
- Predictable monthly payments.
- Easier cash-flow forecasting.
- Protection against rate increases.
- Greater certainty during the fixed period.
Potential limitations include:
- Early repayment charges.
- Higher initial pricing.
- Restrictions on overpayments.
- Refinancing costs when the fixed period ends.
A fixed rate does not necessarily last for the full mortgage term. A loan could have a 20-year term but only a five-year fixed period.
Borrowers should establish what happens after the fixed period ends.
Variable commercial loan interest rates
A variable rate can increase or decrease during the loan term.
It may track an external reference rate or follow the lender’s internal variable rate.
Potential advantages include:
- Lower initial pricing in some cases.
- More flexible repayment conditions.
- Possible savings when reference rates fall.
- Fewer early repayment restrictions on certain products.
Potential limitations include:
- Payments can increase.
- Future costs are less certain.
- Cash-flow projections may become less reliable.
- A lender’s internal rate may not move directly with Bank Rate.
Businesses should test whether they could afford higher payments before selecting a variable product.
A rate that appears manageable today should remain manageable under a realistic stress scenario.
What affects a commercial loan interest rate?
Loan-to-value ratio
Loan-to-value compares the loan amount with the property’s assessed value.
For example, a £600,000 loan against a £1 million property represents 60% loan-to-value.
A lower loan-to-value generally reduces the lender’s exposure. This can support more competitive pricing.
However, valuation type and property marketability also matter.
Business affordability
For owner-occupied premises, lenders may examine:
- Business turnover.
- Net profit.
- Existing commitments.
- Cash flow.
- Management accounts.
- Filed accounts.
- Bank statements.
- Financial forecasts.
The lender needs evidence that the business can maintain repayments.
A profitable business may still face questions when income fluctuates or existing debts absorb significant cash flow.
Rental income
For investment property, the lender may assess the rent against the proposed mortgage payment.
Its calculation could include:
- Current rental income.
- Lease length.
- Tenant quality.
- Remaining lease term.
- Rent review provisions.
- Vacant periods.
- Property management costs.
A strong tenant covenant can improve the perceived security of the income.
Property type
Standard offices, shops, industrial units and warehouses may attract broader lender interest.
Specialist properties may require a more detailed assessment.
Examples include:
- Hotels.
- Care homes.
- Public houses.
- Restaurants.
- Petrol stations.
- Places of worship.
- Leisure facilities.
- Purpose-built healthcare premises.
Specialist properties can be harder to sell or reuse. That may affect the rate, valuation and maximum loan-to-value.
Borrower experience
Relevant management or property experience can strengthen an application.
A lender may consider whether the borrower understands:
- The business sector.
- Property maintenance costs.
- Regulatory obligations.
- Tenant management.
- Market demand.
- Refinancing risks.
Experience does not guarantee approval. However, it can help establish that the proposal has been carefully considered.
Credit history
Commercial lenders may review both business and personal credit records.
Issues could include:
- Missed payments.
- County Court judgments.
- Defaults.
- Tax arrears.
- Overdraft use.
- Existing secured borrowing.
- Late company accounts.
An adverse credit entry does not always prevent borrowing. Its date, value, reason and current status can affect the outcome.
Loan purpose
The lender will need a clear explanation of how the funds will be used.
Purchasing established premises may present a different risk from funding a business turnaround.
Where substantial building work is required, development finance may be more appropriate than a standard commercial mortgage.
Interest rate versus total borrowing cost
A commercial loan should not be compared through the interest rate alone.
Additional costs may include:
- Lender arrangement fees.
- Broker fees.
- Property valuation costs.
- Legal fees.
- Administrative charges.
- Account monitoring fees.
- Exit fees.
- Early repayment charges.
- Higher lending charges.
- Personal guarantee costs.
Some fees are paid in advance. Others may be added to the loan.
Adding fees to the balance reduces the immediate cash requirement. However, interest may then apply to those fees.
Borrowers should request a clear breakdown before proceeding.
Worked commercial loan example
Consider a business borrowing £500,000 through an interest-only commercial mortgage.
At an illustrative rate of 7.5%, the annual interest would be:
£500,000 × 7.5% = £37,500
The monthly interest would be approximately:
£37,500 ÷ 12 = £3,125
If the rate increased to 8.5%, the annual interest would become £42,500.
The monthly interest would then be approximately £3,541.67.
That one-percentage-point increase would add roughly £416.67 to the monthly interest cost.
This example excludes fees, capital repayments and other charges.
Short-term commercial finance rates
Not every commercial funding requirement needs a long-term mortgage.
A commercial bridging loan may support a purchase, an auction completion, or a temporary funding gap.
Bridging rates are commonly presented monthly rather than annually.
A monthly rate cannot be compared directly with an annual commercial mortgage rate without considering:
- The expected loan duration.
- Arrangement fees.
- Exit fees.
- Valuation costs.
- Retained or rolled-up interest.
- The proposed repayment strategy.
Short-term finance can be useful when speed matters. However, it requires a credible and achievable exit plan.
How can a business present a stronger application?
Borrowers can improve the quality of an application by preparing evidence before approaching lenders.
Useful documents can include:
- Recent business accounts.
- Management accounts.
- Business bank statements.
- Tax calculations.
- Existing loan statements.
- Property details.
- Lease documents.
- Tenancy schedules.
- Business plans.
- Cash-flow forecasts.
- Details of the deposit.
- Evidence supporting the repayment strategy.
The purpose is not to make the application appear risk-free.
It is to give the lender enough evidence to measure the risk accurately.
Unexplained information can create uncertainty. Clear information allows a lender to make a more informed decision.
Should you choose the lowest commercial interest rate?
Not automatically.
A lower rate could come with:
- A higher arrangement fee.
- Restrictive early repayment charges.
- A shorter repayment term.
- Lower repayment flexibility.
- Additional security requirements.
- Regular financial reporting.
- A personal guarantee.
- Conditions affecting future borrowing.
The most suitable option should reflect the business’s wider objectives.
Cost matters, but flexibility and certainty can also carry financial value.
Questions to ask before accepting a commercial loan
Before proceeding, ask:
- Is the rate fixed or variable?
- What reference rate is used?
- What lender margin applies?
- How often can the rate change?
- What fees are payable?
- Are fees added to the loan?
- Are early repayment charges included?
- Is a personal guarantee required?
- What financial information must be provided?
- What happens when the fixed period ends?
- Can the loan be transferred or refinanced?
- What conditions must be met before completion?
These questions make different offers easier to compare.
Speak with a commercial mortgage adviser
Commercial loan interest rates depend on more than movements in Bank Rate.
The lender will assess the business, property, deposit, income and intended use of the funds.
A commercial mortgage adviser can review these details before an application reaches a lender.
This can help identify suitable funding structures and explain the full cost of each option.
Contact Connect Mortgages to discuss your commercial property or business borrowing requirements.
Connect Mortgages is a credit broker and not a lender. Commercial finance remains subject to lender criteria, valuation and approval.
Some forms of commercial mortgage and business buy-to-let lending are not regulated by the Financial Conduct Authority.
