How Do Interest Rates Work on UK Business Loans?

If you are looking at a business loan, the interest rate is often the first number you see. It is also the number that causes the most confusion. A “low rate” can still be an expensive loan once you add fees, the term, and the repayment structure.

This guide explains how business loan interest works in the UK, how lenders price your rate, and how the Bank of England base rate can affect what you pay. You will also see a worked example so you can sanity check any quote you get.

Quick answer, what “interest rate” means for a UK business loan

Interest is the cost of borrowing money. A lender charges interest as a percentage of the amount you borrow (the principal). If you borrow £50,000 and the interest rate is 10% per year, you will pay interest on top of the £50,000 you repay.

The important point is this, the rate is only one part of the cost. Fees, repayment frequency, and the length of the loan can change the total amount you repay. If you want a deeper breakdown, see our guide on interest vs APR, fees, and total repayable.

The numbers lenders use, interest rate vs APR vs AER

You will see a few different “rate” terms on UK finance pages. They are not the same thing.

• Interest rate: the percentage charged on the money you borrow.
• APR (Annual Percentage Rate): a single percentage meant to show the yearly cost of borrowing, including interest and certain fees.
• AER (Annual Equivalent Rate): most common on savings accounts, it shows the effect of compounding over a year. People often mix it up with APR.

For business loans, APR is usually the best comparison tool when fees differ. Two loans can have the same interest rate but different APRs if one has higher fees. You should also ask for the total repayable and compare that figure too. If you want a quick refresher on APR in plain English, see this APR explainer.

How lenders set your rate, the simple formula

UK business loan pricing often starts with a market benchmark, then adds a lender margin and a risk adjustment. Many variable-rate products are influenced by the Bank of England Bank Rate. The idea is simple.

A common way to think about pricing is: Bank Rate + lender margin + risk adjustments.

The lender margin covers their costs and profit. The risk adjustments reflect how likely the lender thinks it is that they will get repaid, and how easily they can recover money if things go wrong.

This is why two businesses can apply on the same day and get different rates. A firm with strong accounts, stable cash flow, and security to offer often looks lower risk. Lower risk usually means a lower rate.

The Bank of England base rate and why it matters to business loans

The Bank of England Bank Rate (often called the base rate) is a key benchmark for borrowing costs in the UK. When it moves, it can influence how much it costs lenders to fund loans, and that can flow through to business borrowing. You can read the Bank of England overview here: Bank Rate explained.

As of 4 February 2026, the Bank of England held Bank Rate at 3.75%. If you want the detail behind that decision, see the Monetary Policy Summary and Minutes (February 2026). That number matters most if your loan has a variable rate, or if you are shopping for a new loan while lenders are repricing.

One useful rule, base rate changes are not always a perfect 1:1 change in your loan rate. Lenders still price risk, and they can change their margins too. But over time, base rate moves are a major driver of the direction of rates.

Tip: Check the current base rate before you apply, especially if you are choosing between fixed and variable pricing. Then use a calculator to estimate what the payments look like at different rates. Our business loan calculator is a good place to start.

Fixed vs variable interest rates, what changes and when

Most UK business loans fall into one of these two buckets.

• Fixed rate: your interest rate stays the same for the agreed period. Your repayment amount is easier to plan because it does not change due to base rate moves.
• Variable rate: your interest rate can change over time. Some variable loans track a benchmark (like Bank Rate) plus a margin. Others move at the lender’s discretion, based on their funding costs and risk view.

Fixed rates can suit businesses that need predictable monthly outgoings. Variable rates can suit businesses that want flexibility, or that believe rates may fall. The trade-off is uncertainty. If you are deciding between products, it can also help to understand what you are borrowing for. See our comparison of working capital loans vs term loans.

Simple interest vs compound interest (and what most business loans use)

Simple interest is interest charged on the principal. Compound interest is interest charged on the principal and on interest that has already built up.

Many standard term loans feel closer to simple interest in day-to-day use because you repay interest and capital together on a schedule. Compounding can still show up in some products, and it can show up through late payment interest or rolled fees. This is why it helps to focus on total repayable, not just the headline rate.

Worked example, what you actually repay on a business loan

Let’s use a simple example to make the maths real. Imagine a UK business borrows £50,000 over 3 years with a fixed interest rate. The lender quotes a 10% APR, and there are no extra fees.

In plain terms, you repay:

• Capital: the £50,000 you borrowed
• Interest: the lender’s charge for the time you used the money

Your monthly payment depends on the repayment method, but the big takeaway is the same. A longer term usually means lower monthly payments, but more total interest over time. A shorter term usually means higher monthly payments, but less total interest.

If you want to run your own numbers with different terms and rates, use the business loan calculator. If you are already paying a high rate, it can also be worth testing refinance options with a business loan refinance calculator.

Now imagine the same loan is variable, priced as Bank Rate + 6%. If Bank Rate is 3.75%, your starting rate is about 9.75%. If Bank Rate rises by 0.50%, your rate could rise to about 10.25%, and your repayments can increase. If Bank Rate falls, repayments can ease.

What is a “good” business loan interest rate in the UK?

There is no single average rate that fits every business. Rates depend on risk, security, term length, and the loan product. Secured borrowing is often cheaper than unsecured borrowing because the lender has collateral. For a neutral overview of business loans and how they work, see the British Business Bank guide.

A “good” rate is one that your business can afford, and that matches your risk and needs. The right question is not “is this rate low”, it is “is this the best value for my situation”. Compare APR, total repayable, term, and flexibility. If you want to see how another lender explains the topic, you can also read Funding Circle’s interest rate guide.

How to get a lower interest rate on your next business loan

You cannot control the base rate, but you can control how risky you look to a lender. Here are practical ways to improve your chances of a better deal.

• Show clean numbers: up-to-date accounts, management accounts, and clear bank statements help.
• Prove affordability: lenders want to see cash flow that covers repayments with headroom.
• Borrow the right amount: too much borrowing for your turnover can push rates up.
• Consider security: secured loans can reduce the rate, but they increase your risk if you cannot repay.
• Choose a sensible term: longer terms can cost more overall, even if monthly payments look attractive.

You can also improve your application strength with a few operational steps. See our guide on how to improve your business credit score in 2026, and our checklist on how to qualify for a business loan in the UK.

Common mistakes that make business loans look cheaper than they are

• Comparing the headline rate instead of APR and total repayable, use this guide on interest vs APR and fees.
• Ignoring fees, especially arrangement fees and early repayment charges, see the hidden costs in UK business loans.
• Not checking how variable rates can change, and when.
• Focusing on monthly payment only, not the total cost.

One more common “hidden cost” is risk rather than cash. Many business loans include a personal guarantee. Make sure you understand what you are agreeing to, see how personal guarantees work.

Next steps, estimate your cost, then decide

Interest rates are not random. They reflect market rates, lender margin, and your business risk profile. If you understand the moving parts, you can compare offers faster and avoid surprises.

The best next step is to run a quick estimate using your loan size, term, and likely pricing style (fixed or variable). Start with our business loan calculator. Then check the base rate if you are considering a variable option, via the Bank of England’s Bank Rate page. After that, you can compare like-for-like quotes using APR and total repayable.

If you are already paying a rate that feels high, refinancing can sometimes reduce cost or improve cash flow. See our guide on using business loan refinancing to cut costs.