If you’re looking for a business loan, one of the first questions you need to ask yourself is how much you’re willing to pay in interest. A lower interest rate will cost you less over the life of the loan, but there are other factors to consider.
Key points about business loan interest rates
- Currently, business loan interest rates range from 10-25% p.a.
- Secured business loans have lower interest rates due to the reduced risk to the lender
- Interest payable on your business loan is tax deductible as a business expense
- Ask your lender for the annual percentage rate (APR) to measure the true cost of a loan, as it includes the interest rate, fees and the loan term
How to calculate interest on a business loan
The standard interest rate advertised by lenders is an annual rate. The actual
amount of interest you’ll pay is calculated based on your loan balance and how
frequently you make repayments.
For example, if you take out a business loan for $50,000 and the interest rate on the loan is 15%, the simple interest formula is: $50,000 x (15/100) = $7,500 in interest per year.
Business loan fees
Remember that interest rates may vary depending on the type of loan you choose and your business credit score; loan fees don't change. Fees and charges (e.g. establishment and admin fees) cover the lender's work to process your loan.
Compare interest rates on business loans in Australia
|Type of Loan
|Business overdraft/line of credit
A flexible loan facility to cover short-term working capital needs or
cover fluctuations in cashflow
$5K - $1M
|Secured business loan
Long-term borrowing facility, ideal for buying land, buildings and
other fixed assets
|Unsecured business loan
Short-term loan for any business activity such as purchasing stock or
equipment, covering cashflow fluctuations, or financing expansion or
new business opportunities
$5K - $500K
|Business credit card
|Ongoing credit facility. The amount you can access is called your
$10K - $500K
0 to 55
|Hire purchase/equipment finance
|Fixed-term lease of plant, business equipment
|Fixed-term lease of plant, business equipment
$20K - $2M
Access cash from outstanding invoices by selling them to a third party
3-5% of the invoice value
|Merchant cash advance
A short-term loan that you repay as a percentage of daily EFTPOS
credit and debit card sales, plus a small fee
$10K - $500K
10-20% of daily card sales
How to compare the cost of business loans (accurately)
Ask your lender for the annual percentage rate (APR), as it factors in the interest rate, fees and loan term and displays a single percentage rate you can use to compare loan products. Alternatively, you could ask for a cents on the dollar rate to reflect the interest ratio to every dollar borrowed. Be sure to add all loan costs, including:
- Set-up fees
- Monthly or annual fees
- Transaction fees
- Penalty charges (e.g. early repayment fees, late payment fees)
- Bonuses (such as initial periods of lower interest rates).
Be aware that if fees are added to your loan balance rather than being paid separately, you will also incur interest on these.
Typical business loan interest rates
Typical interest rates on business loans range from 10-25% per annum (p.a.),
depending on the type of finance you choose and your business profile.
Interest rates on business loans are calculated largely based on risk. The
lower the risk for the lender, the lower your rate.
Lenders use the three Cs to set your loan rates and terms.
- Character: This includes your credit rating, business history and experience. Think of it as your business resume.
- Capital: Your business revenue, assets and liabilities.
- Collateral: The cheapest interest rates are generally on secured business loans where an asset — usually property — is used as collateral. Unsecured business loans have higher interest rates to reflect the risk to the lender.
Check out how interest rates will impact your loan repayments and overall cost
business loan calculator.
With some types of business finance like secured business loans, you’ll typically make fixed repayments on an agreed schedule (e.g. monthly or fortnightly), which may include repayment of some of the loan principal and interest, or be an interest-only payment.
With other types of financing, such as business overdrafts and business credit cards, the amount of interest charged and your minimum repayment amount will depend on how much you have borrowed, and is generally calculated on your debit balance, then charged at the end of the repayment period.
With unsecured business loans, the interest calculation used may not be based on a traditional annual percentage rate. It’s more likely to be calculated using a factor rate (when the interest rate is expressed as a decimal). Use a calculator to convert factor rates into an annual percentage rate (APR).
How to find the cheapest business loan rates
The cheapest business loan is not always the one with the lowest interest rate. Business loan fees and the loan term (the amount of time the lender gives you to repay your loan) will also impact your finance cost.
Here is an example that illustrates why the cheapest interest rate doesn't necessarily equate to the cheapest business loan.
|Annual percentage rate (APR)
|Total cost of the loan
|Total interest paid
|Total fees paid
The cheapest business loan is...
Loans 2 and 3 are the cheaper business finance options despite having the highest interest because loan fees are lower or zero. The APR reflects the true cost of the loan.
Let's get started! Get a business loan quoteSee if you qualify
Other factors that impact business loan interest rates
If you have property or other assets to offer as collateral, you can expect to pay lower interest rates because there's less risk for the lender (they can repossess the asset if you default). Lenders also offer longer terms and larger loans for your business with secured finance. Some lenders, especially the big banks, may only be prepared to provide you with finance if you have security to offer.
On the other hand, unsecured loans are not backed by collateral, making them riskier to lenders and more expensive to borrowers. Unsecured finance is generally shorter term, and borrowing amounts are limited.
Lenders tend to offer lower interest rates to established businesses with a solid record of profitable trading. That’s because they can reasonably expect to get their money back with interest on the agreed schedule.
If you have a small or newly-established business like a startup, you may still be able to secure finance, but you can expect to pay higher interest rates as an incentive for the lender to take on the added risk.
Fixed or variable rates
Another important consideration is whether your business loan interest rate is fixed or variable. Fixed rates give you certainty over how much you'll pay for an agreed period (typically up to five years) but often come with early repayment restrictions, leaving you locked into a higher rate even when interest rates fall.
On the flip side, variable rates go up and down throughout the term of your loan in line with the rest of the market. It means you can benefit from savings if interest rates go down during the period of your loan — but it can also leave you vulnerable to much higher costs if interest rates go up.
Type of lender
For borrowers with a good credit history, non-bank lenders can generally offer competitive interest rates because they use technology to analyse your business profile and have less overheads. Non-bank lenders also have more lenient eligibility requirements, which affords riskier borrowers the opportunity for finance but at a higher interest rate due to the risk.
Banks are seen as more reputable but tend to have stricter lending criteria (including credit rating, collateral and financial history) which many small and midsize enterprises (SMEs) cannot meet.
Terms and conditions
Business finance often comes with specific terms and conditions. As a general rule, the higher your risk, the more likely a lender will impose conditions when lending you money. For example, some lenders may prohibit you from taking out additional loans or may impose restrictions on how you can use your borrowed funds. This could impact your ability to expand your business or prevent you from offering discounts and incentives to your customers during the term of your loan.
Invoice finance rates explained
Invoice finance or factoring (as it’s often called) is an alternative type of business finance, so rates are calculated differently. Factoring involves selling your unpaid invoices to a third party or ‘factor’ to receive up to 80% of their value in advance. The factor is responsible for collecting payment on the invoices and then paying you the remainder of the amount due, minus their fee. Typically, factoring fees range from 3-5% of the invoice value.
FAQs about business loan interest rates
Is there a big difference between secured and unsecured business loan rates?
Typical interest rates can range from 10-15% p.a. for secured business loans where an asset like property is used as collateral. Unsecured business loans have higher interest rates, between 15-20% p.a.
Are interest rates on bad credit business loans higher?
Yes, interest rates on bad credit business loans are higher and can range from 15% to 35%. You can secure a more competitive rate by providing security for the loan. Be sure to research bad credit loan options from reputable online lenders who will offer you fair terms and reasonable interest rates.
Is a fixed or variable rate better?
The choice between a fixed or variable rate depends on your risk tolerance and market conditions. Fixed rates offer certainty of repayments, which helps when managing cashflow. However, you typically can’t make extra repayments during the fixed period without incurring additional fees. With variable rates, you’ll pay less interest when interest rates go down and can make extra repayments to pay off the loan faster. However, you’ll pay more in interest when rates go up, which introduces a level of uncertainty.
What are the fees and charges for a business loan?
Some lenders don’t charge any additional fees or charges, while others have fees like establishment fees (up to 3% of the loan amount), and ongoing account maintenance charges (up to $25 per month). Business loan products have different fee structures depending on the lender or any limited offer on the finance, which is common practice to attract new borrowers.
What are the different types of interest rates on business loans?
All lenders have their own method of calculating interest payable on a business loan. The main types of interest rates include:
Annual rate (simple interest): The annual interest charged on the principal amount. This rate does not include fees or charges.
Annual percentage rate (APR): The yearly interest rate charged on the loan over the term, plus all compounding fees and charges.
Factor rate: The interest on the loan is expressed as a decimal figure.
How do you compare business loan rates?
Different lenders use different methods to calculate interest, but you can ask your lender for the annual percentage rate (APR) equivalent or work out the conversion yourself. The APR can be used to calculate the cost of the loan, expressed as an annual rate. You can then compare rates by asking different lenders for the APR.
Are business loan interest rates tax deductible?
Yes, the interest portion of a business loan is usually tax deductible because it’s considered a business expense. This applies to most business finance options, including term loans, lease agreements, business credit cards, etc.
Does the RBA set interest rates for business loans?
The Reserve Bank of Australia (RBA) has an indirect impact on business loan interest rates. It sets the cash rate, which impacts the cost of borrowing money for commercial banks. Business cycles, supply and demand (an increase in demand for money or credit will raise interest rates), and other market conditions also affect interest rates.