By Rachel Murphy Andrew Pentis Katie Lowery, CNN Underscored Money
Published 5:13 AM EDT, Mon December 11, 2023
The trajectory of business loan rates hinges partly on Federal Reserve policymaking, and in uncertain economic times, are likely to hold steady. But what does that mean for the best business loans and their providers in 2024?
Though you can expect similar costs of financing your startup, small or established business, your options could expand in the next calendar year. Changes to Small Business Administration (SBA) loans make 7(a) and 504 loans more accessible than they’ve been in the past. And if you don’t qualify for competitive-rate SBA loans — and can’t snag an attractive APR from private lenders — you might consider alternatives.
Banks, credit unions and online lenders may have to make room for a growing competitor: shorter-term financing from the companies you may already do business with, such as PayPal (now offering loans and working capital, not just payment processing), QuickBooks and DoorDash, among similar outfits.
Oh, and don’t forget about a whole new set of business grant application deadlines in 2024.
Forecasting the best business loans and rates in 2024
After more than a decade of sub-3.00% percent federal funds rates, borrowers have faced higher rates since October 2022. The federal funds rate is the baseline interest rate of money held in the Federal Reserve Banks. Other financial institutions use this as the starting point for how much interest to charge their borrowers.
“Keeping the federal funds rate at zero percent for the long term just isn’t economically sustainable,” said Michael Barnett, founder and CEO of Loanspark, an online marketplace. “I believe that we’re in a reset moment. I believe the federal government will maintain its position over the next 12 months or, if anything, decrease by a quarter- to a half-percent between now and the 2024 election.”
Barnett said that it would be extremely rare to see big moves on the federal funds rate in the run-up to a presidential election. As a result, he expects business loan rates to remain at their current level or slightly decrease in 2024.
Current interest rates are based on a 5.33% federal funds rate (as of October 2023), plus the lenders’ expenses, profit and risk. Some loans, such as those guaranteed by the Small Business Administration, require a rate cap, but these loans are also the most difficult to qualify for. Current SBA loan rates range from 11.00% to 15.00%, calculated by charging the base rate plus 3.00% to 6.50%.
Where to get business funding in 2024
Small and established businesses, as well as startups, have more lending options than ever, including banks, online lenders, credit cards and lines of credit.
SBA loans
The Small Business Administration exists to support small businesses that can’t find funding through other means. To make lending to these businesses more enticing, the SBA guarantees a portion of the loan, ensuring that lenders will not be left with bad investments if the borrower defaults.
SBA loans continue to have competitive rates but remain incredibly labor-intensive to obtain. Not all companies qualify as small businesses under the government’s definition (dependent on staff size and average annual receipts), and some industries — such as gambling, cannabis and adult entertainment — are ineligible.
If your business meets the eligibility requirements, there are three options available:
7(a) loans are the most common SBA loan. They can be used for various purposes, including buying real estate, working capital, supplies, equipment and refinancing current debt.
504 loans offer loans of up to $5.5 million through certified development companies, but they can’t be used for working capital, consolidating debt or renting real estate. Companies that apply must also have a net worth south of $15 million, operate as a for-profit business in the U.S. and have had an average net worth of less than $5 million for the preceding two years.
Microloans are available for businesses that need $50,000 or less to be used for working capital, inventory, equipment and the like. There are no material changes to fees for microloans in 2024.
Non-SBA loans
While many businesses instinctively turn to their banks for loans, Barnett said that small- to medium-sized businesses (SMBs) have found funding increasingly difficult to obtain from traditional sources.
“For the last few years, banks have been focusing on relationship banking with large companies because that’s where the deposits are,” said Barnett. “Post-Covid, banks have really tightened their belts and have a significantly lower appetite for credit for small businesses.”
The Federal Reserve Bank has reported similar findings since October 2022, noting that smaller and newer companies are considered to be a higher risk to lenders.
Business grants
Unlike loans, small business grants don’t have to be repaid, but an extensive application process typically requires a grant proposal, and there is no guarantee you’ll receive funding. On average, only one in seven applications is awarded a grant, according to GrantWatch, a subscription-based directory.
Grants often fund a specific program, such as the Geriatrics Workforce Enhancement Program (GWEP). With a maximum award of $1 million, this grant funds companies that educate and train their workforce to care for older adults by working with community partners and increasing their health outcomes.
GWEP is just one example — thousands of grants will be available in 2024. The best place to start searching is at Grants.gov or SAM.gov. These government-affiliated portals offer advanced search features to help narrow down opportunities and guide businesses to the appropriate application channels. Many grants are also provided at the state and city level.
Private companies and nonprofits may also offer grants. For example, the Second Service Foundation provides capital grants to veterans and their families to develop business ideas on a rolling basis throughout the year, along with coaching and classes that help prepare them for pitch sessions.
Alternative resources
With limited access to bank loans, many SMBs have turned to online lenders, which offer more flexibility and sometimes alternative funding sources. Barnett said that some of the top lenders are now companies that already service small businesses, such as Quickbooks (which offers term loans) and DoorDash (cash advances).
While these novel methods offer ease and speed, they come with higher interest rates than the harder-to-qualify-for SBA loans. But they have other advantages, such as keeping your finances organized.
“The companies that small business owners have a relationship with are going to be inspired to provide the best deals to the business owner because they are already connected to that business by another relationship,” said Barnett. “They don’t want to ruin their existing relationship and lose a customer.”
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