Learn how to work the cost of your next business loan. The lowdown on interest rates, fees and terms.
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 $820Annual fees $0 to $1000Minimum loan amount $0 to $50kMaximum loan amount $120k - $100m |
Learn More |
| Secured bank loan | Long term borrowing facility ideal for buying land, buildings and other fixed assets | 2.97% - 9.83% |
Application fee $0 to $2500Annual fees $0 to $750Minimum loan amount $0 to $250,000Maximum 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 $1875Annual fees $0 to $750Minimum loan amount $0 to $100,000Maximum loan amount $100m |
Learn More |
| 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 $450Interest-free days 0 to 55 |
Learn More |
| 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% |
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| 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 |
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| Hire purchase / asset purchase financing | Medium-term facility suitable for buying plant, business equipment | 4.6% - 15% |
Application fee $0 to $400 |
Learn More |
| 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 |
Learn More |
| 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 |
Learn More |
| 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 |
| 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
|
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:
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:
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.
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:
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.
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.
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.
Learn more about the actual process of applying for a business loan online.
