Commercial loans are loans made to businesses. These loans can range from short-term loans that allow the company to pay bills -- known as "corporate paper" -- to longer-term loans intended to help a company purchase capital equipment or expand its operations. Nearly all loans issued by a lender to a business require the business to pay an interest rate. As interest rates are in constant flux, there is no "average" rate of interest on commercial loans.
Determining Loan Rates
Generally, a lender issuing a loan to a business will set the interest rate of the loan according to prevailing market rates. These prevailing market rates are determined using indexes that measure the interest rates at which a number of lenders are lending money. Indexes generally measure the interest rates of a specific group of lenders or a type of loan. The rates that appear on these indexes can generally be considered the "average" interest rate of a certain type of commercial loan at any one time.
Credit Rating
In addition to the movements of indexes, lenders will also determine the rate at which they loan to businesses based on the company's credit history. Many companies have formal credit ratings determined by credit rating agencies. The higher a company's score, the lower the rate of interest the company pays. Some credit rating agencies offer the average rate of interest assigned to companies with particular scores.
Macroeconomic Variables
One of the main factors that affect interest rate a business pays is the economy. In times of economic turmoil, interest rates may rise as lenders fear businesses may fail and thus default on loans. The higher rate of interest charged on these loans is intended to compensate the lenders for the additional risk of lending money. In addition, the actions of a country's central bank, such as the interest rate at which it is willing to lend money to banks, will greatly affect the prevailing interest rate.
Other Factors
A number of other factors also affect the interest rate a company pays on a loan. For example, the payment plan that the company agrees to, including the length of the loan and the payment size, will affect the kind of interest rates it can receive. In addition, if the company provides collateral or is taking out the loan for a specific function, the interest rates will be shifted.
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