Guide to business loan interest rates in Australia
Like any financial product, business loans are a trade-off. A business loan gives you quick access to the funds your business needs, but you’ll have to pay interest on the loan in return. Interest is the primary way lenders profit from providing business finance (otherwise, they would simply be giving money away!)
Below we’ll cover everything you need to know about business loans interest rates so you can compare business loans with confidence.
What are business loan interest rates, and how do they work?
Business loan interest rates are the price you pay for borrowing money from a lender. The amount of interest you pay depends on the size of your loan (loan amount), the term of your loan, and your business’s financial situation.
Interest is calculated as a percentage of the principal amount of the loan, which is the original amount borrowed. The principal plus the interest is what you’ll need to repay the lender in full at the end of your loan term.
For example, let’s say you take out a $10,000 business loan with an interest rate of 10% p.a. over two years. The total amount you would need to repay would be $11,000, made up of $10,000 in principal plus $1,000 in interest.
How do lenders determine their interest rates for business loans?
Lenders set their own interest rates, and they’re usually based on a combination of the following factors:
- The cost of funding: Lenders need to cover the cost of funds they borrowed in order to lend to you. When the cost of funding goes up (such as when the Reserve Bank of Australia raises the official cash rate), lenders will often raise their interest rates to cover this cost.
- The health of the economy: A strong economy usually means higher demand for loans, leading to higher interest rates.
- Competition: If many other lenders are competing for business loans, they may be willing to offer lower interest rates to win your business.
- Your personal and business circumstances: Lenders will also consider your personal and business circumstances when setting the interest rate for your loan. Things like your personal and business credit history, the size of your loan, and the security you can offer will all play a role in determining the interest rate you’re offered.
What are the different types of business loan interest rates?
There are two main types of business loan interest rates:
Fixed interest rates: As the name suggests, fixed interest rates stay the same for the entire term of the loan. This means your repayments will also stay the same, making it easier to budget for your loan repayments.
Variable interest rates: Variable interest rates can go up or down over the life of your loan. This means your repayments could also increase or decrease, making budgeting for your loan repayments more difficult.
Most business loans have either a fixed or variable interest rate, but some lenders will offer a combination of both. For example, you might have a loan with a fixed interest rate for the first year, followed by a variable interest rate for the remaining term of the loan.
What are the benefits and drawbacks of each type of business loan interest rate?
Fixed interest rates
The main benefit of a fixed interest rate is that it gives you certainty about your repayments. This can make budgeting for your loan repayments much easier, as you’ll know exactly how much you need to set aside each month.
The main drawback of a fixed interest rate is that if interest rates fall during the life of your loan, you’ll miss out on the lower rates.
Variable interest rates
The main benefit of a variable rate loan is that if interest rates fall during the life of your loan, your repayments will also go down. This can save you money on your loan repayments.
The main drawback of a variable interest rate is that if interest rates rise during the life of your loan, your repayments will also go up. This can make budgeting for your loan repayments more difficult, as you won’t know exactly how much you’ll need to set aside each month.
So, which type of interest rate is right for you?
The answer to this question depends on your personal circumstances and your appetite for risk. If you’re comfortable with the idea of your repayments going up or down, a variable interest rate could save you money. However, if you’re worried about rising interest rates, a fixed interest rate might give you some peace of mind.
How does having an unsecured loan vs. a secured loan affect interest rates?
If you’re looking for a business loan, you might be able to choose between a secured loan and an unsecured loan. The type of loan you choose will affect your offered interest rate.
Secured business loans are typically cheaper than unsecured loans, as they’re less risky for lenders. This is because, with a secured loan, the lender can take your assets (such as your commercial property or equipment) if you default on the loan.
Unsecured loans are typically more expensive than secured loans, as they’re riskier for lenders. This is because, with an unsecured business loan, the lender can’t take your business assets if you default on the loan.
So, if you’re looking for a business loan with a low interest rate, a secured loan might be the right option for you. However, if you don’t have any assets to offer as security, an unsecured loan might be your only option.
How can I reduce the amount of interest I need to pay on my business loan?
There are a few things you can do to reduce the amount of interest you need to pay on your business loan:
Make extra repayments: If you can afford to make extra repayments, you can reduce the amount of interest you’ll pay over the life of your loan.
Pay off your loan early: If you pay off your loan early, you’ll save on the interest you would have paid if you’d kept the loan for the full term. However, your lender may also charge early repayment fees, so it’s important to check the terms and conditions of your loan before you make any decisions.
Shop around for a better deal: If you’re not happy with the interest rate you’re being offered, it might be worth shopping around for a better deal. You can refinance your business loan with a different lender or try to negotiate a better deal with your current lender.
OnDeck’s business loans
Now that you know a bit more about interest rates for business loans, consider the benefits of applying for a business loan with OnDeck:
- Access between $10,000 and $250,000 to use for any business purpose, from supporting your business’ cash flow to buying new equipment and more.
- 6-24 month terms.
- Low loan set-up fees of 3% of the entire loan amount.
- Loyalty discounts – renew your loan, and your set-up fee will be halved to 1.5%.
- Fast and simple application process – apply in minutes and get an approval decision in hours.
Interest rates for OnDeck business loans are determined based on your business credit score. A higher business credit score means a lower interest rate and vice versa.
Frequently Asked Questions
What is the average interest rate on a business loan?
In Australia, interest rates on business loans tend to range between 5% and 30%. Loans with the highest interest rates are generally short-term, payday-style loans with less stringent application requirements. In contrast, loans with lower interest rates have stricter lending criteria and are long-term, designed to be paid over several years based on the lender’s trust in your business’s ability to repay in full.
Can I get a business loan with a 0% interest rate?
No, you cannot get a business loan with a 0% interest rate. However, some lenders may offer introductory rates for new customers that are lower than their standard rates. It’s important to compare the interest rate and the fees charged by different lenders before deciding which loan is right for you.
Can you negotiate your interest rate with business loan providers?
It may be possible to negotiate your interest rate with some business loan providers, but this will depend on the lender and the type of loan you’re applying for. It’s always worth trying to negotiate, especially if you have a good relationship with your lender.
What factors other than interest impact the cost of a business loan?
The main factor that impacts the cost of a business loan is the interest rate. However, there are other costs to consider, such as one-time or ongoing fees and charges, which can vary depending on the lender. Make sure you compare the total cost of different loans before you make a decision.
Fees and charges that may apply to a business loan include:
Application fee: A one-time fee charged when you first apply for a loan.
Loan set-up fee: A one-time fee charged when your loan is approved and you’re ready to start drawing down the funds.
Monthly or annual fees: Some lenders charge a monthly or annual fee, which is usually calculated as a percentage of the total loan amount.
Early repayment fee: Some lenders charge a fee if you repay your loan early, which can eat into any savings you make from refinancing.
Late payment fees: If you miss a loan repayment, you may be charged a late payment fee.
Administration fees: Some lenders charge an administration fee to cover the cost of processing your loan application and managing your account.
What is the difference between an interest rate and a comparison rate?
An interest rate is expressed as a percentage of the total loan amount. Interest rates don’t include other fees and charges that may apply to a loan.
A comparison rate is the cost of a loan, including the interest rate and other fees and charges, expressed as a single percentage figure. Comparison rates are designed to help you compare different loans on a like-for-like basis.
Prepared by OnDeck Capital Australia Pty Ltd ABN 28 603 753 215 (“OnDeck”) for general information purposes only. Content may belong to or have originated from third parties and OnDeck takes no responsibility for the accuracy, validity, reliability or completeness of any information. Information current as at May 2022. You should not rely upon the material or information as a basis for making any business, financial or any other decisions. Loans issued in Australia are subject to the terms of a loan agreement issued by OnDeck. Loans are subject to lender approval. OnDeck® is a Registered Trademark. All rights reserved.