What are business loan interest rates?
Business loans are an excellent way to finance improvements to your business, such as new equipment and facilities, staff training and recruitment, and marketing campaigns. However, as with any type of loan, there will be an interest rate attached to it that will determine how much you ultimately end up paying back to the lender.
Below, we’ll explain business loan interest rates so that you can make a wise financial decision when applying for business finance.
Business loan interest rates explained
Business loan interest rates function the same way as interest rates on other types of loans, such as vehicle finance or a mortgage on a residential property. The interest rate you pay on your loan is determined by the difference between what a lender is willing to lend to you and what they believe they can get in return.
How do business loan interest rates work?
Let’s look at an example of two different business loan options:
– Loan 1 offers money at an interest rate of 9%
– Loan 2 offers money at an interest rate of 5%
If both loan 1 and loan 2 are for $10,000 for a maximum loan term of 12 months, then on loan 1 the total repayment would be $10,000 + ($10,000 x 9%) = $10,900. For loan 2, the total repayment would be $10,000 + ($10,000 x 5%) = $10,500.
The interest rate on a business loan represents what percentage of what you borrow (the principal) you will have to pay back as interest. The interest rate is how lenders profit from lending money.
What’s the difference between a variable interest rate and a fixed interest rate?
A fixed interest rate stays the same throughout the life of the business loan and won’t change with market conditions. A variable rate will move up and down with a particular market indicator but may be capped to stop the interest rate from increasing too much.
A fixed interest rate is generally higher than a variable one because the lender is promising not to alter it based on changing market factors. Variable rates may start lower than fixed rates but carry the risk of surpassing fixed rates.
What is a fixed rate period?
A fixed rate period is set at the beginning of a loan and will remain in place for a certain amount of time before moving to a variable rate or being locked. A fixed rate period is usually one, three, five or ten years.
How do business loan lenders determine a borrower’s risk?
Business loan lenders determine your risk as a borrower by examining your business credit score. Your business credit score is a reflection of your reliability when borrowing money and making repayments. If you have a very limited business credit history, your personal credit history (how well you manage your personal debt) may also be scrutinised.
The way your business credit history is interpreted varies from lender to lender, as they each will have different lending criteria. Some lenders may be willing to take on more risk than others and lend to businesses with poor credit history, but they will generally charge a higher interest rate to compensate.
Learn how to improve your business credit score. You can check your business credit score for free with OnDeck without any obligation or footprint.
What other factors influence interest rates?
Other than the lender’s preference and your perceived risk as a borrower, business loan interest rates are also influenced by the type of loan you get.
Secured business loans, for example, are backed by collateral (business assets like machinery or equipment). A secured loan will generally have a lower interest rate than an unsecured loan (no collateral). This is because, with a secured loan, the lender has the right to repossess and sell certain business assets in the event you default on the loan (can no longer make repayments).
Interest rates on business loans are also influenced by what the Reserve Bank of Australia (RBA) does with the official cash rate. The official cash rate is what most banks use to set their business loan interest rates.
To what extent the official cash rate influences your interest rate will depend on how much of an impact it has on the overall economy (and what kind of environment you’re in). For example, suppose there’s a lot of inflation or economic growth. In that case, this will usually lead to the cash rate being increased, which will mean interest rates will rise in turn (especially if there’s a lot of demand for loans).
Is the interest rate the only thing that influences the cost of a business loan?
No, the total amount of money you pay back on your business loan will also be influenced by fees and charges covering the management of your account. Different business loan providers will have varying fees and charges, but the most common ones are:
- Establishment Fee – a one-off charge for setting up the business loan.
- Early Repayment Fees – a charge that will apply if you repay your loan balance before it is due to be repaid.
- Late Payment Fees – a charge that will apply if you miss a business loan payment.
- Account Keeping Fees – This is the fee that will apply to your account for administration.
There might also be other monthly fees and charges, depending on the lender you engage.
Should you use interest rates to compare business loans?
When you are trying to compare business loans, the advertised interest rate is not the only thing you should look at. You also need to take into consideration what other fees and charges are associated with the business loan.
Understanding what these other fees are will help you work out your real costs when taking out the loan and whether or not the finance is affordable based on your business needs and personal objectives as a business owner.
What about interest rate calculators?
Interest rate calculators for business loans can help indicate what interest rate you could potentially receive when applying for a loan. However, they should not be relied upon to give you an exact outcome, as many other factors will impact the lender’s final decision.
If you are looking for a flexible business loan, OnDeck could help. OnDeck offers business loans ranging from $10,000 to $250,000 on 6-24 months terms. Enjoy an easy application process with low loan origination fees of only 3%.
Frequently Asked Questions
What is the best way to compare business loans?
The best way to compare business loans is to look at the actual interest rate, the different fees and charges, and the lender’s eligibility criteria. If you don’t meet the lender’s eligibility criteria, your loan application will be rejected, which can negatively impact your business credit score.
SMART Box™ is an innovative loan comparison tool that clears up the confusion caused by different loan pricing metrics. Learn more about SMART Box™.
What is a flexible business loan?
A flexible business loan means that the interest rate and repayment terms are determined on a case-by-case basis. This primarily means that your business loan rate and repayment terms will be determined by the individual financial situation of your business.
How do you determine if a lender is fair and trustworthy?
Before you apply for a business loan, you need to determine if the lender is trustworthy by checking their Australian Credit Licence. A lender’s Australian Credit Licence means that they are regulated by ASIC (Australian Securities & Investments Commission).
How do you pay interest on a business loan?
The interest you owe on your business loan will be automatically included in your regular repayments.
What are business loans used for?
Business loans are used to finance assets that serve a business function. This can include things like equipment, vehicles, staff, and commercial property.
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 September 2021. 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.
