Business Loan Interest Rates

Business Loan Interest Rates

Learn how to work the cost of your next business loan. The lowdown on interest rates, fees and terms.

If you’re looking for a business loan, one of the first questions you’re likely to ask is “How much will it cost?” The answer to that question will depend on many factors – starting with the type, term and amount of finance you need – and it may not be as simple to answer as you think.

The most obvious cost of business finance is the interest rate. But that is far from the only cost, and it’s crucial that you take into account all the one-off and ongoing charges associated with each product when you compare them.

Lowest interest rates are not always the cheapest...


Loan 1 Loan 2
Loan Amount $40,000 $40,000
Interest Rate 9% 9.5%
Establishment Fees $850 $0
Monthly Fee $8 $0
Term 5 Years 5 Years
Monthly Repayment $830.33 $840.07
Comparison Rate (incl. Fees) 10.34% 9.5%
Total Cost of Loan
$51,150
$50,404
Be aware, too, that some loans come with conditions that may restrict the way you do business, which could result in a substantial opportunity cost. In this guide we’ll outline the factors that influence the cost of small business loans, show you how to calculate and compare the true cost of a loan, and provide a snapshot of the current cost of business finance products.

Compare Business Loan Interest Rates


Before you do, be aware that the type of finance you choose will greatly affect how much you repay.

To avoid paying more than you should for your business finance, make sure that you match the term and type of your loan with your business need.

Note: Interest that you pay on your business loan should be tax deductible.

Type of Loan Purpose / Description Interest rate range Notes
Bank overdraft / Line of credit A flexible loan facility to cover short-term working capital needs / smooth out fluctuations in cash flow
Secured on commercial property
5.07% - 12.45%
Secured on residential property
5.22% - 12.45%
Application fee
$0 to $820
Annual fees
$0 to $1000
Minimum loan amount
$0 to $50k
Maximum loan amount
$120k - $100m
Secured bank loan Long term borrowing facility ideal for buying land, buildings and other fixed assets
2.97% - 9.83%
Application fee
$0 to $2500
Annual fees
$0 to $750
Minimum loan amount
$0 to $250,000
Maximum loan amount
$500,000 - $100m
Unsecured bank loan Any business purpose – such as purchasing stock or equipment, covering cash flow fluctuations, or financing expansion or new business opportunities
2.97% - 12.83%
Application fee
$0 to $1875
Annual fees
$0 to $750
Minimum loan amount
$0 to $100,000
Maximum loan amount
$100m
Business credit card For purchasing business consumables / equipment

To cover short-term working capital needs and smooth out fluctuations in cash flow
Purchase rate
5.88% - 20.95%
Annual fee
$0 to $450
Interest-free days
0 to 55
Bank guarantee An alternative to a deposit or bond, where the bank guarantees your payment obligations under a contract

For purchasing plant, equipment or stock as an alternative to providing a deposit to the seller
Secured by deposit or other acceptable security
0.5% - 2.6%
Paid quarterly in advance
Application fee
0 to 0.5%
Business term loan Long term borrowing facility Ideal for buying land and buildings, plant and equipment or drawing equity from existing assets to cover business set-up or expansion costs
4.63% - 11.7%
90 days rate
1.7% to 1.75%
Commercial bill of exchange Short-term or long term, for any commercial or investment purpose – including bridging finance or smoothing out seasonal cash flow / working capital fluctuations
90 days rate
1.7% - 1.75%
Example: Client borrows $100,000 for a period of 90 days. The bank quotes them a rate of 7.50%. On day 1 the client receives the discount amount of $98,184.26. In 90 days time, they repay $100,000 to the bank, for a total interest charge of $1,815.74.
Lease financing Fixed-term lease of plant, business equipment
4.69% - 5.1%
Application fee
$300 to $500
Hire purchase / asset purchase financing Medium-term facility suitable for buying plant, business equipment
4.6% - 15%
Application fee
$0 to $400
Personal loans Short to medium term borrowing facility suitable for buying business equipment or any other business need
Comparison rate
7.75% - 19.09%
Fees are included in the comparison rate
Factoring Sale of accounts receivable / invoices to a third party at a discount rate, for an immediate cash injection Can be used for any business purpose such as buying equipment or covering working capital requirement
1.5% -6.3%
Finance up to 80% of your total invoice value
Merchant cash advance A short term loan that provides an immediate cash injection Can be used for any business purpose such as buying equipment or covering working capital requirements
Usually ~20%
~20% of your future credit card sales until your advance and fees have been repaid
Trade finance Various forms of short term loans or guarantees that facilitate international or domestic trade, by reducing the risks to both parties Financing bridges the gap between the placing of an order and receipt of payment from your customer, enabling you to pay your suppliers or provide surety that they will be paid
Rates are set daily and vary depending on the currency and term
Minimum loan amount
$20k
*Note that this information is drawn from publically advertised business loan interest rates as at June 2017. Interest rates can change at any time, and should you apply for a business loan the actual interest rate offered to your business will be confirmed by the individual lender.)

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Other factors that impact business loan interest rates;


In addition to the type and term of your business finance, and the amount you need to borrow, these are some of the main factors that can influence how much your business loan is likely to cost:

1
SecuritySmall Business Loans
Security

If you have property or other assets to offer as collateral, you can expect to pay less than you would for an unsecured loan, because the lender is taking much less of a risk. Some lenders, especially the big banks, may only be prepared to offer you some types or levels of finance if you have security to offer.

2
Trading historySmall Business Loans
Trading history

This is also a matter of risk – if yours is an established business with a strong record of profitable trading, a lender has good reason to expect they will receive their interest payments and principal repayments on the agreed schedule. If you have a small or newly-established business you may still be able to find the finance you need, but you can expect to pay higher interest rates and fees as an incentive for the lender to take the greater risk.

3
Type of lenderSmall Business Loans
Type of lender

Bank finance is typically lower in cost than that offered by alternative or ‘fintech’ lenders – but it’s also a lot harder to secure. Banks are notoriously risk averse, and tend to have strict criteria (including credit rating, collateral and financial history) which many SMEs simply cannot meet.

What’s more, the application process for bank finance can be arduous and lengthy – if you need fast, flexible business finance you may need to approach an alternative lender instead, but you can expect to pay more for your loan.

4
Fixed or variable ratesSmall Business Loans
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 will pay for an agreed period (typically up to five years) but often come with restrictions about early repayment, and leave you locked into a higher rate even if interest rates fall. Variable rates allow you to benefit if interest rates go down during the period of your loan – but also leave you vulnerable to much higher costs if interest rates go up.

The economic factors that influence interest rates are totally beyond your control, so it’s important to look closely at the impact that rate increases could have on your ability to repay your loan before applying for any type of variable rate finance. Interestingly, Australia has the 4th highest short term commercial rates of the G20.

5
Terms and conditionsSmall Business Loans
Terms and conditions

Business finance often comes with conditions. The higher the risk you present, the more likely a lender is to impose conditions when offering you finance. Even the big banks will often prohibit borrowers from taking out additional loans – but some alternative lenders, which are not subject to the same regulation as Australia’s banks, may impose other restrictions. These could impact your ability to pursue opportunities to expand your business, or prevent you from offering discounts and incentives to your customers during the term of your loan.

Be aware that even if accepting restrictive conditions results in a lower interest rate, they could have a hefty financial impact on your business in the long term.

How much interest will you actually pay?


Note that the standard interest rate advertised by your lender is an annual rate – the actual amount of interest you’ll pay will depend on your loan balance and how frequently you make repayments:

Small Business Loans

Annual interest rate
Number of repayments per year x loan balance = interest paid

With some types of business finance, like secured business loans, you’ll typically make fixed repayments on an agreed schedule, which may include repayment of some of the loan principal as well as interest, or be an interest-only payment.

With other types of financing, such as overdrafts and credit cards, the amount of interest you are 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. Use our business loan calculator here.

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How to compare the cost of business loans


The interest rate advertised by your lender doesn’t represent the true cost of your business finance – especially for borrowing where the interest compounds (i.e. where your interest is added to your loan balance, so you can end up paying additional interest on the interest you have already been charged).

The standard interest rate is just a starting place when it comes to calculating the true cost of a loan. Before you can compare products you’ll need to calculate the comparison rate by adding in all the other costs, including:

  • One-off set up fees
  • Monthly or annual fees
  • Transaction fees
  • Penalty charges (for example, early repayment fees, late payment fees)
  • Bonuses (such as initial periods of lower interest rates).

Be aware that if fees and charges are added to your loan balance rather than being paid separately, you will also incur interest on these.

A word on factoring


Invoice factoring is a very different type of business finance to traditional borrowing, so the costs have to be calculated differently. Factoring involves selling your invoices (the amounts due to your business from customers) to a third party, or ‘factor’.

You can expect to get an immediate cash advance of up around 70% – 90% of the invoice amount, which can be very useful if cash flow is tight. The factor takes on the responsibility of collecting payment on the invoice, and then pays you the remainder of the amount due, less a fee.

Typically, factoring fees range from 1.5% to 4.5% of the invoice per 30 days outstanding (so you will generally pay substantially more for an invoice due in 60 or 90 days). But it’s important to be aware that there may also be other costs, such as money transfer charges, administration fees and penalties, and these can vary widely between lenders.

Terms and conditions vary too, and can have a big impact on the cost – you may pay less if you sign up for a fixed period and agree to sell all your invoices to the factor, while the flexibility to pick and choose when and which invoices to sell is likely to come at a higher cost.

There’s another serious potential cost to consider too – the impact on your reputation and future business. You have no control over the way the factor behaves when collecting payment, and their conduct could affect your relationship with your customers.

Choosing a lender and loan product


If you’re ready to apply for a business loan, make sure you shop around and compare not just interest rates but also fees and charges, terms and conditions and the reputation of the lender.

The right type of finance for your business will depend on your specific financial circumstances, tax status and long term business goals. If you need help making a decision or navigating your way through the massive array of products on offer, it’s a good idea to take advice from your accountant, business broker or financial advisor.

Grow the business you want.

See if you qualify