How to understand business loan interest rates

Before applying for a business loan, make sure you know the kind of interest rate you’ll be paying for various loan types.

Applying for a business loan can do a lot to help your business out of a tight financial spot. Alternative and traditional lenders offer a range of loan products suited to most types of businesses and their financial needs.

There’s more to a business loan than just having money deposited into your account and paying it back. Besides possible establishment and monthly fees, lenders will also charge you interest in exchange for providing the loan.

This guide will take you through the different types of interest possible charges when taking out a business loan.

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Rates last updated December 15th, 2018
Name Product Min Loan Amount Max. Loan Amount Loan Term Application Fee Product Description
NAB QuickBiz Loan
1 to 3 years
Apply for up to $100,000 and get a response within 60 seconds. No upfront or ongoing fees and a transparent fixed rate.
Lending Express Business Loans
0.25 to 2 years
Apply online for up to $500,000 and get access to over 25 lenders through Lending Express.
Prospa Business Loan
0.25 to 2 years
A business loan available up to $250,000 that can be funded in 1 business day. Must have a turnover of $6,000+ per month and provide 6 months of trading history, 3 months history for existing business purchases. Note: Businesses taking a loan out will have no repayments until 6th January, 2019
Valiant Finance Business Loan Broker
0.25 to 5 years
A Small Business Lending Specialist from Valiant Finance can give you access to competitive business loans from over 60 lenders. Loans between $5,000 and $1 million are available. Request a call – your loan can be funded in 1 business day.
Moula Business Loan
0.5 to 2 years
A loan of up to $250,000 that can be approved and funded within 24 hours. Available to businesses with 6+ months operating history and $5,000+ monthly sales.
GetCapital Flexible Business Loan
0.5 to 2 years
Initial draw down fee
A flexible business loan up to $500,000 with convenient top up and redraw facilities. Business must have been operating for 9 months+ and have monthly sales of $10,000+ Flexible Business Loan
0.5 to 2 years
Initial draw down fee
A business loan up to $100,000 for unsecured loans, or $500,000 for secured loans that you can use for any business purpose. Transparent costs and redraw facility available.
OnDeck Business Loans
0.5 to 2 years
2.5% origination fee
Apply for up to $250,000 and receive your approved funds in one business day. Minimum annual turnover of $100,000 and 1 year of trading history required.
Spotcap Loans
0.25 to 2 years
Benefit from a fixed interest rate and no upfront fees with a loan available up to $400,000. Must have been operating for at least 18 months and have turnover over $200,000.

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What is interest?

Interest is expressed as a percentage of the principal loan amount and is the additional money you pay to be able to borrow. For example, if you borrow $12,000 with an interest rate of 5.5% p.a. over a period of one year, you will repay $1,030 per month. This means you will pay $30 per month in interest or $360 interest in total. You will repay the lender a total of $12,360, which includes principal and interest, by the end of the loan period.

How does my business profile affect the interest I pay?

The loans terms offered, including the interest you pay, are based on how much of a risk you represent. If your business is new with few valuable assets and a small turnover, you may be paying a higher interest rate than an established business with a bigger profit margin.

Interest rates vary depending on the lender, the lending criteria and the loan type, but in most cases the following factors are taken into account:

  • Your business profile
  • Annual turnover
  • Valuable assets
  • Loan type and purpose
  • Whether the loan is secured or unsecured

What interest is charged on business loans?

Here are some of the terms used to express the different forms of interest charged on various business loan types.

  • Annualised percentage rate (APR). Besides interest, the lender charges various fees for setting up and providing a business loan. The APR includes all of these fees and the interest you’ll be charged and is expressed as a percentage, therefore giving you a more realistic idea of what the loan actually costs.
  • Discount rate. Invoice factoring companies charge this rate, which is a percentage of the invoice amount being financed. For example, if your invoice value is $3,000 and the discount rate percentage is 5%, you pay the lender $150.
  • Factor rate. This is a multiplier applied to the amount loaned on unsecured fixed-term loans. A factor rate is expressed as a figure, such as 1.2 or 1.5. For example, if the loan amount is $10,000 and the factor rate is 1.2, you will repay $12,000 ($10,000 x 1.2).
  • Early repayment fees. Repaying a loan before the end of the loan term means you stop paying the lender interest. Some lenders charge a fee to compensate for the interest they would’ve received had you continued to the end of the loan term.

Fixed versus variable interest rates

When you apply for a business loan from a traditional lender, you’ll have the option of a fixed or variable interest rate, or a combination of the two, for larger amounts borrowed over longer loan periods.

  • Fixed interest rate. The interest you pay on the principal is fixed for the loan term. This means that fluctuations in the cash rate won’t affect your repayments. A fixed rate allows for peace of mind, as you can budget for the same repayment amount each month.
  • Variable interest rate. This rate can fluctuate during the loan term. When the interest rate fluctuates, so do your repayments. If the cash rate drops, business loan rates tend to drop as well, thereby lowering your repayments. However, rates can be raised as well.
  • Combination. This is often offered as an introductory or honeymoon loan period. Lenders offer a fixed rate for the first year or two of the loan, after which the interest rate reverts to the standard variable rate for the rest of the loan period.

When calculating the cost of a business loan, it’s important to make sure that the loan product is suited to your business profile and objectives. For example, if you plan to repay the loan quickly, choose a lender that won’t charge early repayment fees.

The loan should also suit your business’s budget. Besides the interest payments, lenders also charge a series of one-off and monthly fees for providing the loan, all of which can take a chunk out of your budget over the loan period. Make sure you take the interest rate into account when comparing your business loan options.

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2 Responses

  1. Default Gravatar
    StanMay 29, 2018

    Is 6.1% high for a small bussiness loan of around $80,000

    • Default Gravatar
      AshMay 29, 2018

      Hi Stan,

      Thank you for visiting finder.

      Lenders have two ways of charging an interest rate on your business loan which is either having a Fixed Interest or Factor Rate in which interest is charged on the Principal owing.

      Interest Rate can vary from Lender to Lender; you should compare all the fees that are included in the loan to know if it’s right for the cash flow of your business. Interest Rates are being calculated based also on their assessment of your financials. The 6% Interest Rate that you have is lower than the 12.95% of NAB QuickBiz Loan. You may also compare the other Small Business Loans listed on this page.

      I hope this helps.

      Let us know if there is anything else that we may assist you with.


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