Business Loan Interest Rates
Understand and compare business loan interest rates across different products and providers with Small Business Loans Australia.
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Table of contents
Types of business loan rates
The two main types of business loan interest rates are fixed and variable.
A fixed rate is just as it says – fixed – and it will not change during the lifespan of the loan.
A variable rate can rise or fall throughout the duration of the loan, depending on changes to an underlying benchmark. For example, the RBA may change the cash rate in Australia, so the lender may amend your business loan rate accordingly.
The rate advertised by lenders is the annual rate they are offering loans from. Just be aware this rate could change with a variable rate loan.
It also doesn’t mean your business will qualify for a loan at the advertised rate. There are lots of factors which could push up the rate of a loan and we’ll explore these later.
The actual amount of interest you’ll pay is dependent on your loan balance and how frequently you make repayments.
As interest is calculated based on the current balance, the amount you repay reduces over time, even if the rate remains the same.
In contrast to this, there is one other type of business loan rate to be aware of. This is known as a factor rate.
Under a factor rate loan, the repayment amount is based solely on the initial borrowed sum. This simplifies the repayment terms, but it becomes less favorable as the loan term extends as it does not recalculate as the balance reduces.
How are small business loan interest rates calculated?
Ultimately, the rate a lender will charge depends on the level of risk involved. The risk profile of a borrower is always unique, so don’t necessarily expect to achieve the advertised ‘starting at’ loan rate, unless you feel confident your business financials are in tip-top shape.
The level of risk you have as a borrower is influenced by:
The age of the business
Young businesses, and particularly start-ups, will always find it more difficult to access finance. Those that do access finance will likely have to pay a higher interest rate.
The size of the business
Data from the Reserve Bank of Australia finds small businesses to be twice as likely to default on a loan than standard mortgage customers and almost three times as likely compared to large businesses. Thus, SMEs pay a higher rate of interest.
SMEs default at a higher rate than large businesses
Size of the loan
The amount you’re borrowing will also impact the interest rate you receive on a business loan. Generally, the larger the loan is in proportion to the borrowing capacity of the business, the higher the risk and rate will be.
Industry of your business
Riskier industries will attract higher interest rates. Real estate investments and commercial construction loans can sometimes be at higher rates than other business loans.
Secured vs Unsecured
When a loan is secure by collateral, it mean less risk to the lender, so business loan interest rates are lower. On the flip side, business loan rates on unsecured loans are generally higher.
The type of business finance
Different finance products tend to have different business finance rates. We’ll look at each of these later in more detail.
The economic climate
During times of economic uncertainty, banks and lenders may charge higher interest rates.
The base rate
Linked to the economic climate is the underlying cash rate set by the RBA. If the RBA raises the cash rate, it then costs more for banks to borrow money between themselves. Banks and lenders usually pass these costs on to new borrowers and existing borrowers on a variable rate loan.
Type of lender
Banks tend to provide the best business loan rates as they have access to the cheapest sources of funding. But, it can be difficult to qualify for a loan through a bank and the process is generally quite slow.
Online lenders raise capital on the secondary markets so charge higher interest rates. However, they have higher approval rates and are more understanding of small businesses. Generally, they process loans fast.
Your creditworthiness
Lastly, it goes without saying that businesses with a strong credit history and a solid financial profile should qualify for lower rates than those with weaker credit. Bad credit business loans will attract a higher rate of interest.
Interest Rates vs APR
The interest rate is not the only cost of a business loan. It’s the area which fluctuates, depending on the level of risk involved, but there are other fixed fees which can drive up the cost.
The annual percentage rate, commonly referred to as the APR, takes into account the interest rate, associated fees and the repayment terms to display a single percentage rate. This percentage rate can thus be used as an indication of how much you’ll have to pay over the course of a year.
Establishment fees, which cover the cost of setting up the loan, are common, but some lenders might charge an annual service fee too. These sorts of fees are included in the APR.
Using an APR is the only sure fire way to evenly compare loan products.
Business loan interest rates by product
Business loan rates will vary from one product to the next. Products like equipment finance, where the equipment purchased act as security on the loan, tend to have lower interest rates.
| Loan Type | Securities | Terms | Estimated Interest Rate |
| Unsecured Business Loan | Unsecured | 3-24 months | 10% – 20% |
| Business Line of Credit | Either | 3-12 months | 10%-20% |
| Invoice Finance | Invoices | 3-180 days | 3%-5% |
| Merchant Cash Advance | Pending Payments | 1-2 months | 15%-25% |
| Equipment Finance | Equipment | 1-5 years | 7%-15% |
| Asset Finance | Asset | 1-7 years | 7%-15% |
| Working Capital Loan | Unsecured | 1-24 months | 1.75% p/m |
| Secured Business Loan | Secured | 1-10 years | 7%-15% |
| Business Credit Card | Unsecured | Ongoing | 13%-25% |
| Business Overdraft | Either | Ongoing | 10%-20% |
Note that these are estimates only and the actual interest rate you’re offered will vary depending on your unique business circumstances.
Current business loan rates in Australia
Using data from the RBA we can see how small business loan rates have increased in 2023, in line with the rise of the RBA cash rate.
The RBA cash rate started to rise in May 2022
More specifically, we can also see how loan rates have increased by fixed vs variable rate loans, and whether or not a loan was secured.
Take a look at how small business loan interest rates have increased over the last two years:
| All new loans funded – small business | New loans residentially secured – small business | New loans, fixed rate – small business | New loans, variable rate – small business | |
| Jul’19 | 4.61 | 4.41 | 5.03 | 4.32 |
| Jan’20 | 4.22 | 4.11 | 4.84 | 3.80 |
| Jul’20 | 3.78 | 3.37 | 4.30 | 3.32 |
| Jan’21 | 3.66 | 3.19 | 3.99 | 3.38 |
| Jul’21 | 3.38 | 3.05 | 3.58 | 3.22 |
| Jan’22 | 3.46 | 3.07 | 4.05 | 3.09 |
| Jul’22 | 4.95 | 4.29 | 6.43 | 4.34 |
| Jan’23 | 6.44 | 5.72 | 7.18 | 6.06 |
| Jul’23 | 7.19 | 6.72 | 7.54 | 6.98 |
The average business loan interest rate continued to fall from 2019 to 2021, with residentially secured small business loans being offered as low as 3.05% in July 2021.
However, since early 2022, average business loan interest rates have been on the rise. A fixed rate small business loan cost an average of 7.54% in July 2023.
We can also see that lenders build in a bit of fat into their pricing on fixed rate loans. If you’re confident that rates will not increase in the future, it might be worth opting for a variable rate loan.
Keep in mind that these commercial loan interest rates are largely driven by the rates provided by banks. What’s more, the RBA defines all loans under $2 million as small business loans. Companies borrowing this much could still be much larger than your average SME.
Small SMEs can expect to pay interest rates that are more in-line with our estimated business loan rates per product.
How to get the best rates on a business loan
There are a few things you can do achieve better business loan rates:
Improve your credit / time trading as a business
This takes time but if your business is unable to attain a loan, or the interest is just too costly right now, it might be best to revisit a loan at a later date. You can monitor your business credit score for free with the popular online lender OnDeck.
Once you’ve strengthened your credit score, you should qualify for lower interest rates.
Shop around
Always compare multiple lenders to ensure you’re getting the best possible deal.
Remember, it’s not just about the business loan interest rates. Be sure to compare the APR so that you’re comparing like-for-like, and including all the associated costs between different lenders
Through Small Business Loans Australia you can apply with 50+ lenders in just a matter of minutes, and get partnered with the most appropriate lender for your business needs.
- Use our form to get tailored business loan offers within minutes.
- Access to 50+ business lenders with a single application.
- Clear and transparent terms. Multiple means of secured financing available.
- A simple and easy process which will not impact your credit score.
Negotiate
It might sound silly, but don’t be afraid to negotiate. Particularly if you’ve gone to the effort of shopping around.
If the financial performance of your business is strong, you’ll be in an even stronger position to do so.
Negotiating with the lender might help you to achieve a better rate.
Secure the loan with property or other asset
Putting up collateral will help you to secure a lower interest rate on your loan because it reduced the risk for the lender.
Of course, if you default on the loan, the lender can seize the collateral. Be aware of the risks.
Summary
Business loans come in various forms, and each has its own interest rate structure. The interest rate charged by lenders is influenced by factors such as the borrower’s age, size, industry, the loan amount, the base rate set by institutions like the RBA, and the type of lender. A business’s creditworthiness also plays a crucial role.
Banks typically offer better rates but have a more stringent qualification process, while online lenders might charge higher rates but are more accommodating.
Besides interest rates, be sure to consider the APR of the loan as this considers other fees, providing a comprehensive yearly cost.
RBA data shows business loan interest rates in Australia have increased since 2022. Always compare your options to get the best deal and be absolutely sure that you can meet the repayment schedule.