Quick answer
Business lenders earn the gap between what money costs them and what they charge you, plus fees. That gap pays for funding, staff, broker commissions and the share of loans that go bad, and what's left is profit. Knowing which income streams a lender relies on helps you predict its behaviour: how hard it chases early repayment, what it charges to exit and how it treats arrears.
Key points
- The core income is the margin between a lender's cost of funds and the price it charges, less losses
- Fees (establishment, line, account-keeping, exit and default) can be a large slice of revenue on short loans
- Brokers are usually paid by the lender, either upfront, as a trail, or both, so ask how yours is paid
- Fixed-fee and factor-rate products are priced on the whole term, so early repayment saves less than you expect
- A lender's revenue model tells you what it wants you to do: keep drawing, renew, or pay out on time
A lender is a business, and like any business it has revenue, costs and a margin it wants to protect. Nothing sinister in that. But borrowers who understand how their lender earns can read an offer more shrewdly, because the product’s design usually reveals what the lender is counting on.
This guide follows $100,000 through a lending business and shows where it ends up.
What does a lender pay for before it lends a dollar?
Before profit, a lender has to cover four things.
- Cost of funds. A bank pays depositors and wholesale investors for money. A non-bank pays whoever supplies its warehouse facility or fund. Private lenders pay investors a return. Whatever the source, the money has a cost.
- Operating costs. Staff, technology, credit assessment, legal, compliance and premises.
- Acquisition costs. Advertising and broker commissions, which are paid per settled loan.
- Losses. Some borrowers will default. The lender prices an allowance for that across the whole book, so reliable borrowers help pay for the unreliable ones.
What remains after those four is profit. The RBA’s February 2026 Bulletin noted that business lending margins have narrowed since 2023, mostly on loans to large businesses, which helps explain why lenders are chasing small and medium businesses harder, and why they work on fees and volume as well as price.
How does money move through a loan, in dollars?
An illustration, not any lender’s actual numbers. A non-bank lends $100k for 12 months and charges the borrower $14k in total (fees and interest or fixed charge combined).
| Line | Amount |
|---|---|
| Total paid by the borrower over 12 months, beyond the $100k | $14,000 |
| Less: cost of the money the lender used | ($5,000) |
| Less: broker commission paid at settlement | ($2,000) |
| Less: assessment, legal and servicing costs | ($2,500) |
| Less: allowance for loans that go bad across the book | ($2,000) |
| Left as profit | $2,500 |
Look at the shape. A lot of the $14k goes to costs that exist before and regardless of whether you repay on time. That is why a lender cares about three things: getting repaid, keeping the cost of acquiring you low, and reusing the money quickly. Each shapes behaviour you can see.
Which income streams do lenders use?
Lenders mix these in different proportions, which is why two products with a similar “price” can cost differently.
Net margin (interest)
The central one for banks and most term lenders: interest charged on the balance minus the lender’s own funding cost. It accrues as you owe money.
Establishment and application fees
A one-off charge for setting up the loan. For a short loan it can dominate the cost. A $2,500 establishment fee on a 12-month loan is a different proposition from the same fee on a 15-year commercial property loan. See establishment fee in the glossary.
Ongoing and account fees
Monthly or annual fees for keeping the facility, plus line fees on unused limit. These matter most on lines of credit, where you might use little of the limit and still pay for all of it. Check line fee.
Fixed charges and factor rates
Some products, such as merchant cash advances and many short-term fintech loans, quote a multiplier on the amount advanced instead of interest. A $60k advance at a factor of 1.15 means $69k repaid, so $9k of cost. Because the charge is set up front, repaying early may not reduce it. Our factor rate guide and calculator explain more.
Invoice finance charges
Invoice financiers typically earn a service fee on the sales ledger plus a discount charge on funds advanced while invoices are outstanding. The longer your customers take to pay, the more the financier earns, which is worth bearing in mind when you compare it with other options.
Exit, early repayment and extension fees
Charged when the loan ends, is paid out early, or runs past its date. On private and bridging loans, extensions are a real revenue line, and one more reason to have a firm exit plan.
Default interest, late fees and enforcement costs
Charged when things go wrong. Reputable lenders would generally rather not use them, but the loan contract will permit them, and some of the costs, like legal fees, are added to what you owe. Read the default clause. Our guide on what happens if your business loan defaults shows how it plays out.
Cross-selling
Banks in particular earn from the whole relationship: transaction accounts, merchant facilities, payroll and insurance. That is why a bank can sometimes price a loan finely if you bring your banking. It’s also why a lender with a narrow product range may lean on fees.
How do brokers fit in?
Most brokers are paid by the lender when a loan settles, with an upfront commission and sometimes a smaller ongoing trail based on the balance. Some also charge the borrower a fee. None of that is hidden wrongdoing, and a good broker earns it by matching you to a lender that suits your file. But it means the broker’s pay depends on a loan settling, so ask:
- How are you paid on this loan, and by whom?
- Do you charge me a fee as well?
- Which lenders are on your panel, and which are you not using for me, and why?
Our guide on how brokers get paid goes through the models, and using a finance broker covers when it’s worth it. Our own broker versus direct lender comparison is the short version.
What does a lender’s model tell me about the product?
Because the income streams differ, so do the incentives. A few patterns:
| If the lender mostly earns from… | Expect… | Protect yourself by… |
|---|---|---|
| Interest on the balance | Lower cost for paying down early, willing to take early payout | Checking for exit fees |
| Upfront or fixed fees | Little savings for repaying early | Pricing by total dollars over your real holding period |
| Line and account fees | A product that looks cheap but costs while idle | Asking for the fee on the unused limit |
| Renewals and top-ups | Offers to “top you up” repeatedly | Checking each top-up’s cost and your total repayments |
| Extensions and default charges | Strict dates and costly slips | Having an exit that works with margin |
A useful habit is to ask “what does it cost me if I do exactly what I plan, and what does it cost me if I’m a month late?” The gap between those two numbers shows how much the lender depends on mistakes.
Is a lender’s profit a problem for me?
No. A lender that doesn’t make money can’t lend to you or support you in a bad month. A healthy margin on a fairly priced loan is a sign of a lender that will still be there. The thing to watch isn’t the profit; it’s whether the price is clear, the contract is readable and the product fits the job.
The test is simple: add up everything you’ll pay in dollars, compare it with the benefit the money gives you, and compare it with another quote. The loan cost comparison calculator does the addition, and our guide to the true cost of a business loan lists the items people forget. For banks specifically, remember that they are often the cheapest money available. When you fit their criteria, their offer deserves serious consideration.
Want to see what a fairly priced option looks like for you?
Once you understand the economics, the next step is putting real numbers on your own situation. Tell us the purpose, the amount and the deadline, and we’ll look at which structures suit it.
The enquiry takes about a minute and doesn’t involve a credit check. We won’t hand your details around to a crowd of lenders. A real person reads what you’ve written and calls you to talk it through. Accurate answers on the form, including what you already owe, mean the first option we raise is the one most likely to work.
Frequently asked questions
If I pay no establishment fee, how does the lender earn?
Through the margin or other charges: a higher ongoing price, an account fee, a line fee on the unused limit, or a fee on exit. Fees move around between categories, so compare the total dollars over the time you expect to hold the loan.
Do lenders pay brokers?
Usually yes. Many lenders pay a broker an upfront commission when the loan settles and sometimes a smaller ongoing trail. Some brokers also charge the borrower a fee. A good broker will tell you what they earn and from whom without being asked twice.
Why do lenders like loans that run the full term?
Because the interest or fixed charge over the whole term is their revenue. On a loan with a fixed total, early repayment may save you little, while the lender gets its money back sooner to lend again. Read the early payout terms.
What are line fees?
A line fee is a charge for having a credit facility available, usually calculated on the limit, whether or not you use it. It pays for the lender holding capital ready for you. Our glossary has more under line fee.
How do lenders make money when I'm late?
Through default interest, late fees and enforcement costs recovered from the borrower and security. Well-run lenders would usually rather be repaid than collect penalties, but the contract allows them, so read the default clauses.
Is a lender with high fees always a bad deal?
Not necessarily. Sometimes the fee is the price of speed or of a loan nobody else would write. The test is whether you understand the total cost in dollars and whether the money earns more than it costs.