Quick answer
Interest is the price a lender charges for letting you use its money. On an Australian business loan it is usually worked out on the balance you still owe, often calculated daily and charged monthly, so it shrinks as the debt is repaid. Total interest in dollars, plus fees, is the true cost of borrowing, and business interest is generally tax deductible when the money is used to earn assessable income.
Key points
- Interest is charged on the outstanding balance, so it falls as you pay the loan down
- On a principal and interest loan, the early repayments are mostly interest
- Fixed-charge products (factor rates) work differently: early payout may not save much
- Deductibility depends on what the borrowed money is used for, not what secures it
Interest is what you pay for time. A lender hands over a lump sum today, you hand it back over months or years, and interest is the charge for the gap in between. Everything else in a loan offer, from the term to the repayment frequency, changes how much of that charge you end up paying.
How do lenders work out the interest?
Most Australian business loans use a reducing balance. Each day the lender looks at what you owe, works out that day’s interest, and adds the daily amounts together to debit once a month. Pay the balance down and the next month’s interest is smaller. Leave it untouched and the charge stays the same.
There are three common patterns:
- Principal and interest: every repayment covers that period’s interest plus a slice of the debt, so the debt is cleared on the final instalment.
- Interest only: for an agreed stretch only the interest gets paid, and every dollar borrowed remains owing when that stretch ends.
- Capitalised interest: nothing is paid month to month; the interest piles onto the debt and gets cleared in one hit at the end, a set-up common with bridging and development loans.
Some fast online products don’t use any of these. They set a fixed dollar charge at the start, often expressed as a factor rate, and that charge doesn’t fall if you pay the money back sooner.
Why does the first year cost the most?
Because the balance is highest at the start. Take a $100k business term loan over three years with fixed monthly repayments of about $3,321. Across 36 months the business repays roughly $119,570, so total interest is about $19,570.
| Month | Interest in that repayment | Balance afterwards |
|---|---|---|
| 1 | about $1,000 | about $97,680 |
| 12 | about $730 | about $70,560 |
| 24 | about $400 | about $37,380 |
| 36 | about $33 | $0 |
Add the year-one repayments together and roughly $10,400 of them is interest. More than half the loan’s lifetime interest is gone within twelve months. That surprises many owners who assume the cost is spread evenly.
It also explains why timing matters if you plan to refinance. Pay that loan out at month 12 and the remaining interest, around $9,150, is never charged, less any early payout or break cost the contract allows. With a fixed-charge product the sum might be close to nothing, because the whole charge was locked in on day one. Run both shapes side by side in the loan cost comparison calculator.
Is business loan interest tax deductible?
Usually, provided the funds go toward producing assessable income. The Australian Taxation Office looks at what the funds were spent on, not at what secured the loan. That means interest on a loan secured against your home can be deductible when the money went into the business, while interest on a company loan that paid for a family holiday generally isn’t. If a loan was used for a mix of the two, the interest is normally split and only the business share claimed. Keep records showing where the money went, and check the treatment with your accountant before tax time.
Interest isn’t the whole cost
An offer with less interest can still cost more once fees are added. Establishment fees, monthly fees, valuation and legal costs and default interest all sit on top. The sensible test is simple: what is the total in dollars you’ll repay, and how much of that is above the amount you borrowed? Our guide to business loan costs and fees walks through each charge.
Want a figure based on your own numbers? Share the amount and purpose and a specialist will put a realistic total in front of you.
Related terms
Principal, prepaid interest, variable rate, amortisation and repayment schedule. For how cash rate moves flow through, see how the RBA cash rate affects business loans.
Comparing what the money will really cost?
Understanding how interest accrues tells you what to ask. Matching it to a lender whose repayment shape suits your cash flow is where we come in. The form is roughly sixty seconds of typing, and no credit enquiry is run because you asked a question. Nothing gets forwarded to a crowd of lenders either: one experienced person studies your numbers and rings you. Put down the real amount, purpose and timing, so the structure we suggest first actually fits.
Frequently asked questions
How is interest calculated on a business loan?
Most banks and non-bank lenders calculate interest daily on the outstanding balance and debit it monthly. Some short-term and online lenders instead set a fixed total charge at the start, which doesn't reduce if the balance falls faster. Your loan agreement says which method applies.
Is interest on a business loan tax deductible?
Generally yes, when the borrowed money is used to earn assessable income for the business. If part of the loan funds private spending, only the business share is usually claimable. Your accountant or registered tax agent can confirm how it applies to your structure.
Does the RBA cash rate change my business loan interest?
On a variable loan it usually does over time, because lenders' funding costs move with the cash rate. Fixed loans don't change until the fixed period ends. Private and short-term lenders price more on risk and security than on the cash rate.
What is the difference between interest and fees?
Interest is charged over time on the money you owe. Fees are separate charges, such as an establishment fee, a monthly account fee or a discharge fee. Both count toward the total cost, so compare offers on dollars repaid rather than on interest alone.
Can unpaid interest be added to the loan?
Yes. When interest is added to the balance instead of being paid, it is called capitalised interest, and future interest is then charged on that higher balance. Construction, bridging and some caveat loans work this way.