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How does a business loan work?
A business loan allows your business to borrow funds to purchase assets or access working capital for day-to-day operations and growth opportunities.
The business repays the loan, plus interest and fees, over a fixed term. Typically a business can borrow an amount of money relative to the level of revenue it generates.
- Borrow anywhere from $5,000 to $1m+
- Loan terms from 1 month - 7 years
- Fixed interest rates starting from 7.50% p.a. (excellent credit), with variable rates also available
- Available to businesses, sole traders and self-employed individuals for any business purpose
- Weekly, fortnightly or monthly repayments to match your cash flow
- Available as a fixed-term loan or ongoing line of credit
According to Money data, the average small business loan amount in Australia is $94,845. The top reasons businesses apply for a loan are: Buying vehicles or transport (41%); day-to-day capital (29%); machinery or equipment (10%).
Best business loan interest rates in October 2024
Business loan interest rates in Australia start from around 7.50-15% p.a. for secured loans and 12-20% p.a. for unsecured business finance. But rates can be higher than on some business loans.
- According to Money’s analysis of 50+ lenders across all borrower categories, the average business loan interest rate is currently 16.75% p.a.
- Bear in mind not all businesses qualify for the same rates. The latest data from the RBA shows small businesses pay an extra 1.46 percentage points per annum on average on business loans compared to large businesses.
- Business finance rates also vary based on the type of loan you choose, as the table below shows, as well as your risk profile as a borrower
Compare business loan interest rates
Business loan option | Small business loans |
|---|---|
Rates starting from | 7.50-15% p.a. |
Business loan option | Unsecured business loan |
Rates starting from | 12-20% p.a. |
Business loan option | Business line of credit |
Rates starting from | 8-15% p.a. |
Business loan option | Business overdraft |
Rates starting from | 8-15% p.a. |
Business loan option | Asset & equipment finance |
Rates starting from | 7.50-15% p.a. |
Business loan option | Invoice finance |
Rates starting from | 3-12% p.a. |
Business loan option | Fit-out finance |
Rates starting from | 7.50-15% p.a. |
Business loan option | Bad credit business loan |
Rates starting from | 18-20% p.a. |
| Business loan option | Rates starting from |
|---|---|
Small business loans | 7.50-15% p.a. |
Unsecured business loan | 12-20% p.a. |
Business line of credit | 8-15% p.a. |
Business overdraft | 8-15% p.a. |
Asset & equipment finance | 7.50-15% p.a. |
Invoice finance | 3-12% p.a. |
Fit-out finance | 7.50-15% p.a. |
Bad credit business loan | 18-20% p.a. |
10 factors that impact your business loan rate
Your personalised business loan interest rate will be based on the lender’s criteria and their assessment of how risky it is to lend to you.
1
The finance type
Secured business loans generally come with lower interest rates, as there is less risk for the lender. A fixed-term loan could also come with a lower rate than an ongoing credit line.
2
Type of security
For asset finance, the asset being used affects the rate. For example, for a business loan to purchase a vehicle, the age and condition of the asset will be a factor.
3
Business turnover
Businesses with a high level of annual turnover (e.g. $5m+) will qualify for lower business loan rates than a lower-turnover business.
4
Time in business
Established businesses generally get lower rates than newer businesses. A minimum of 12 months' trading is a common requirement.
5
Industry
Some lenders tailor their rates based on the industry the borrower operates in. As you’d expect, businesses in lower-risk industries often qualify for lower rates.
6
Whether you're asset-backed
If the borrower providing a personal guarantee is asset-backed (i.e. owns a property), they’ll generally qualify for lower rates.
7
Credit score
A credit score below 600 will make it more difficult to get a business loan, with higher rates applying for low credit score borrowers who are approved.
8
Credit defaults and dishonours
If there are defaults, court orders or insolvencies in the borrower’s credit history, higher rates will apply. Dishonoured payments or being overdrawn on an account could also be considered.
9
ATO lodgement status
Borrowers with no outstanding ATO payments due typically get lower business loan rates. If you are in arrears with the ATO but the payments are manageable, you may still qualify but with a higher interest rate.
10
Loan amount and duration
This isn’t always the case, but some lenders will vary rates based on the loan amount and duration of the finance. Again, the common theme is that greater risk means higher rates.
If you have a strong business loan application, you may also be eligible to apply for larger loan amounts, with longer loan terms and lower fees.
Types of business loans and finance
Secured business loan
A secured business loan is backed by a commercial asset or residential property which acts as collateral to secure the loan. In some cases, you may be able to use commercial property (e.g. your business premises) as collateral.
Secured business finance usually comes with lower interest rates and more repayment flexibility because there’s less risk to the lender. The lender can reclaim and sell the asset(s) if you default on your loan repayments.
Unsecured business loan
A secured business loan is not backed by an asset or collateral. Because the loan isn't tied to any security, interest rates on unsecured business loans tend to be higher to offset the lender’s risk.
That’s because if you default on the loan, the lender may not be able to recoup its losses. Your maximum borrowing amount may also be lower compared to a secured business loan.
Chattel Mortgage
A chattel mortgage is a business loan that’s secured against movable property, like a business car loan or equipment finance. The business owns the asset being financed, but the lender retains a claim on it until the loan is repaid. Chattel mortgage interest rates and other terms tend to be better for borrowers compared to unsecured finance options.
Asset finance
Asset finance is sometimes considered its own category of business finance, but it’s generally just another way of describing a secured business loan, with the asset being financed serving as collateral. There are also a couple of leasing options (covered below) that fall under the umbrella of asset finance.
Business line of credit
A business line of credit gives a borrower access to a predetermined amount of funds that can be drawn on from as needed. Interest is only paid on the amount used, making it a flexible option for managing cash flow and covering short-term expenses. It works similarly to a business credit card.
Business overdraft
A business overdraft allows a business to withdraw more money than is available in its account, up to a specified limit. This provides a safety net for short-term cash flow issues and helps manage unexpected expenses. Interest is charged on the overdrawn amount.
Invoice finance
Invoice finance is a way for businesses to access finance based on the invoices due from their customers. This improves cash flow by allowing a business to effectively get an advance on outstanding invoices.
The way in which invoice finance works varies depending on the provider, with the two main options being invoice factoring and invoice discounted.
Low doc business loans
Low doc business loans are designed for businesses that might not have all the financial documentation typically required for a loan. These loans often have higher interest rates and lower borrowing limits, but offer faster approval processes in a lot of cases.
Bad credit business loans
Bad credit business loans are available to businesses with issues in their credit history. These loans generally come with higher interest rates and stricter terms on account of the higher risk. But they provide crucial short-term funding for small business owners unable to secure traditional loans.
Finance Lease
A finance lease involves a business leasing an asset for a fixed duration, with the option to purchase the asset at the end of the lease term. The business leasing the asset is responsible for maintenance and bears the risks and rewards of ownership.
Operating Lease
An operating lease allows a business to lease an asset for a shorter period, typically less than the asset’s useful life. The leasing provider retains ownership and responsibility for maintenance.
Most popular business loan options right now
Shaun McGowan, Loans Expert
"Increasingly businesses want the freedom of having an approved lump sum of credit in reserve, then only drawing down and paying interest on what they need. This gives the ultimate flexibility as we navigate this high interest environment and changing consumer sentiment."
Shaun McGowan, Loans Expert
Who’s eligible for a business loan?
Generally, the minimum eligibility requirements for a small business loan in Australia include:
- Australian citizenship or permanent residency
- An active ABN or ACN
- Your business must be GST-registered (depending on the lender)
- At least six to 12 months of trading history
- A minimum annual business turnover of $75,000 - $100,000
- The ability to provide financials or bank statements
- A good credit score — the minimum business credit score is 475; for company directors, it's about 500 (it could be less if you're a homeowner).
- Operate in a non-excluded industry (some lenders won’t lend to the likes of gambling-related businesses, debt collection companies and tattoo studios).
How to apply for a business loan
What you'll be asked about your business
Its location, structure, monthly and annual turnover, how long you’ve been operating for and in what sector.
What you'll be asked about the loan you want
How much you want to borrow and for how long (your loan term), plus details of the asset you wish to purchase (if applicable).
Financial documentation you’ll need to provide
Business bank statements from the last six to 12 months, BAS statements and/or tax returns (optional), ABN registration information.
For loans above $150,000, you'll also need to provide
Profit and loss statements, business balance sheet, a business plan outlining how you will use the funds to generate revenue, plus details of business expenditure and how you plan to repay the loan.
It's a good idea to start by using a business loan calculator to work out what your repayments will be and whether you can afford them comfortably.
Structuring your business loan
Andrew Beckett, Head of Broker and Third Party Distribution, Lend
"The two key things to consider are: When do I get paid by my clients? What can I afford to repay on a daily, weekly or monthly basis? Once you know when you get paid and how much, subtract any relevant expenses and outgoings and your remaining amount should cover your loan repayments by at least 120%. Most lenders use what's called a 'debt to service cover ratio' and often look for the coverage to be at least 1.2x."
Andrew Beckett, Head of Broker and Third Party Distribution, Lend
Business loan tax deductions
Something else to keep in mind is that certain costs of using a business loan, including interest and some loan fees, may be tax deductible, according to the ATO.
Tax expert Marianna Agostino of Conscious Wealth Creation told Money that the purpose of the loan determines whether expenses will be tax deductible.
“It’s important to keep business loans for business purposes only," Marianna said. "If you use the borrowed funds for a mix of business and personal reasons, you will need to apportion the interest between business and personal before claiming a deduction.”
The type of business finance you choose may have tax implications too, with options like a chattel mortgage allowing businesses to access depreciation of an asset despite having borrowed to purchase it.
“It’s important to also remember that some loan establishment costs may be deductible over the course of the loan rather than on establishment, ” Marianna added.
Business loan case study
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The good and bad of tapping into business funding beyond the traditional options.
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