What a business loan actually costs
The headline rate on a business loan rarely tells you the real cost. In Australia, business finance is priced three main ways: a nominal interest rate on a reducing balance, a fixed factor rate on the original amount, or a flat fee structure. On top of that sit establishment fees, ongoing fees and early-repayment fees. To compare two loans on a like-for-like basis, ignore the advertised percentage and ask one question of each lender: what is the total amount I will repay, in dollars, over the full term?
The three ways business loans are priced
Nominal interest rate. An annual percentage charged on your outstanding balance. As you repay principal, the interest portion shrinks. This is how most bank term loans and many online lenders quote.
Factor rate. A multiplier on the amount borrowed. A $50,000 loan at a factor of 1.2 means you repay $60,000 in total, no matter how quickly you clear it. Factor rates are common on short-term and merchant cash advance products, and they can translate to a very high annualised cost.
Flat or fixed fee. A set dollar cost for the finance, sometimes framed as “cents in the dollar”. As with factor rates, converting it to an annual figure is the only way to compare it against a normal rate.
A worked example
Say two lenders both offer you $50,000 for 12 months.
| Lender | How it's quoted | Total repaid |
|---|---|---|
| Lender A | 18% p.a. nominal + $500 establishment fee | ≈ $55,500 |
| Lender B | 1.15 factor rate, “no interest” | $57,500 |
Illustrative figures only. Lender B's “no interest” pitch costs about $2,000 more here, even though it never quotes a percentage. The dollar total exposes the difference the headline hides.
Secured vs unsecured
A secured loan is backed by an asset such as property or equipment. Because the lender can recover the asset if you default, secured loans are usually cheaper, but you put that asset at risk. An unsecured loan needs no collateral and funds faster, which is why most online business lenders are unsecured, and why they cost more. Neither is “better” in the abstract; it depends on what you can offer and how quickly you need the money.
Fees to ask about before you sign
- Establishment / origination fee (one-off, sometimes 1–3% of the loan)
- Ongoing or monthly account-keeping fees
- Early-repayment or break fees, if you clear it ahead of schedule
- Direct-debit and dishonour fees
Compare on the dollar total, then enquire
Use the calculator to sanity-check a quote, then let a person walk you through the lenders that fit.
Common questions
- What's the difference between a nominal rate and a factor rate?
- A nominal rate is an annual percentage applied to your reducing balance, like a normal loan. A factor rate is a fixed multiplier on the amount borrowed: borrow $50,000 at a 1.2 factor and you repay $60,000 regardless of how fast you pay it down. Factor-rate loans can look cheap but often work out to a much higher annualised cost, especially over short terms.
- What is a comparison rate?
- A comparison rate rolls the interest rate together with most standard fees into a single percentage, so you can compare loans on a like-for-like basis. Not every business lender publishes one. When they don't, ask for the total cost of the loan in dollars over the full term.
- Why are unsecured business loans more expensive?
- With no asset backing the loan, the lender takes on more risk if the business can't repay, and prices that risk into the rate. A secured loan against property or equipment is usually cheaper but puts that asset on the line.
- What fees should I ask about?
- Establishment or origination fees, ongoing or monthly account fees, early-repayment or break fees, and any direct-debit or dishonour fees. Ask for every fee in writing before you sign.