The business loan interest rate for secured and unsecured business loans
One of the big determining factors of a business loan interest rate is whether the loan is secured or unsecured. A secured business loan is backed by the borrower’s collateral so there’s less risk to the lender. In turn, the business loan interest rate is lower than for an unsecured loan. Usually, there is a substantial difference between secured and unsecured business loans, so keep this in mind when you compare business loan interest rates.
For instance, the interest rate for secured business overdrafts is around 5.5% while the interest rate for unsecured business overdrafts can reach up to 15% per year.
Bank business loans
Information from various bank websites and interest rate comparison sites shows that bank business loan rates can vary greatly. For example, you can get a one-year secured fixed-rate loan for around 3.5% per year. On the higher side, an unsecured variable-rate commercial loan will run around 13%.
Although the business loan interest rate from a bank can be competitive, bank loans have their shortcomings. First, they require a large amount of paperwork and can take up two months for approval. Second, SME research shows that banks reject around 75% of applications from SMEs. Given these drawbacks, this type of business loan is not worth it if you are seeking a small loan amount or a short-term loan.
Traditionally, banks have secured business loans with residential property. According to the RBA’s Access to Small Business Finance report, ‘Banks are reluctant to extend finance without real estate as collateral.’ As housing prices started falling in 2017, some banks are no longer accepting residential property as collateral for business loans. Other banks are tightening standards and looking more closely at residential property prices when considering business lending. So unsecured lower-rate business loans from banks are becoming more out of reach for small businesses.
Business credit cards
Some business owners use credit cards for short-term business finance. The business loan interest rate on credit cards ranges from around 12% to 22% per year. There is a range of options available including cards with frequent flyer points and buyer rewards. The more features the card has, the higher the fees. For the average business owner who doesn’t do a lot a business travel, a no-frills card is probably the best choice due to lower fees and interest charges. Read more about business credit cards.
Equipment finance loan
With an equipment finance loan, the equipment, machinery or vehicle being purchased is the collateral for the loan. This type of loan is also called a “chattel mortgage”. These are short-term loans from one to five years with regular payments, usually monthly. Depending on the lender, the business loan interest rate for equipment finance can range from 6% to 15% per annum.
When you have a business overdraft, you are able to overdraw your business transaction account to a set limit and pay interest only on the amount you are borrowing. The business loan interest rate on a business overdrafts ranges from around 5.5% to 15% per year. The rate will vary depending on whether is secured or unsecured, fixed or variable.
A business line of credit is very similar to a business overdraft and has a comparable range of interest rates. The main difference is that a line of credit is secured by residential or commercial property. Learn more about business overdrafts.
Merchant cash advance
With a merchant cash advance, you are given a loan which is paid back through ongoing credit card and EFTPOS sales from your business. The lender automatically gets a small percentage of these payments until the loan is repaid. The business loan interest rate on a merchant cash advance is around 20% per year. While this form or business loan can be helpful, it only works for businesses that have high amounts of credit card and EFTPOS transactions, such as retail shops and restaurants.
If a business can’t wait to receive payment of customer invoices, it can use the services of an invoice finance company to get paid its money sooner. When an invoice is created, the business sells it to an invoice finance company for a percentage of its value, usually 80% to 95%. The business also pays an advance fee of between 2% and 5% of the money received early. After the money has been paid to the invoice finance company, it pays the remainder to the borrower, minus any fees and charges.
In effect, the business loan interest rate for invoice finance is the advance fee. Although this might seem low, it’s paid for the time the invoice has been outstanding. So if you pay 4% to get your money 60 days early, the annual interest rate on the loan is actually 24%.
Unsecured business loans from online lenders
A new breed of lenders is using leading-edge technology to assess potential borrowers and approve business loans online. With Moula, for example, the online application takes around 10 minutes to complete. In addition, bank account transactions are safely and securely analysed to determine loan approval and amounts. Once approved, the funds are immediately transferred to the borrower’s bank account.
As unsecured loans, the business loan interest rate is higher, starting at around 15%. With unsecured loans from Moula, there are no hidden fees and charges. Also, no fees for direct debits or early repayment. Often, these small business loans are used to boost working capital and cash flow. Find out more about Moula’s unsecured business loans and get some business loan basics.
Making a decision when you know the business loan interest rate
Now that you know the business loan interest rate for a variety of finance products, you can make a better-informed decision. Remember to read the fine print to understand the loan terms and conditions and whether fees and fees apply. To determine the true interest rate, including fees and charges, use the annual percentage rate (APR). To learn more about this, read Unmasking APR: How to Really Compare Business Loan Rates.
For an overview of the business finance options available, read The Complete Guide to Business Loans in Australia.
*The business loan interest rates listed in this article are based on information from websites of banks, non-bank lenders, and business finance brokers. Interest rates were correct at the time of publishing but are subject to change.
A new and better way to compare business loan interest rates
In early 2019, Moula introduced SMART Box™. It’s a tool to easily compare the pricing of different online lenders’ small business loan products using several standardised metrics, including interest rates.
SMART Box™ is a one-page document that shows the basic elements of the loan option being considered, including the Loan Amount, Disbursement Amount, Total Repayment Amount, the expected Loan Term, and Repayment Frequency. It also shows what fees and charges, if any, apply to the loan.
It includes six common loan pricing metrics:
- Total Cost of Credit
- Average Monthly Payment
- Total Interest Payment (TIP)
- Annual Percentage Rate (APR)
- Cents on the Dollar
- Factor Rate.
Learn more on how you can compare business loan interest rates in What is SMART Box™ and How Does It Help Small Business Owners?
Also, check out our business loan calculator for an estimate of payments and total loan cost.