Business Loan Interest: Cost and Tax Questions

Business loan interest is the lender’s charge for borrowed money, but the rate alone doesn’t tell you what a facility costs. Compare dated written offers for the same amount and repayment pattern, then add fees and any final payment. Tax deductibility depends on how your client uses the funds.

For an Australian business, the useful comparison is a client-specific quote. An advertised starting rate or market average can’t establish the cost your client will pay.

Compare Interest Terms

Compare business loan interest by holding the amount, term and repayment pattern constant between offers. Start with the business finance options that suit the client’s purpose, then compare their pricing.

A fixed rate stays the same during the agreed fixed period. A variable rate can change, so its repayment schedule needs a rate-rise scenario as well as the starting calculation. Record when any fixed period ends and how the lender sets the rate afterwards.

The quoted business-loan percentage needs a time basis. An annual percentage applies over a year, while a monthly rate or flat charge needs a different calculation. A flat rate charged on the original amount can produce a different total from interest charged on the falling balance.

For a daily reducing-balance facility, the basic calculation is outstanding balance multiplied by the annual rate, divided by the contractual day count. National Australia Bank (NAB)‘s Business Lending General Terms, effective 30 September 2021, use 365 days for Australian-dollar facilities. They calculate interest daily and charge it monthly unless the Specific Conditions say otherwise.

As an arithmetic illustration, each one percentage point on an unchanged $1 million balance costs $10,000 over a 365-day year. The daily equivalent is about $27.40. This sensitivity calculation measures a change in cost, excluding principal reduction and fees.

Drawdown means taking the borrowed funds. Match whether your client needs the full amount immediately or draws it in stages. For a revolving facility, distinguish interest on money used from any fee charged on the available limit.

Daily calculation, monthly interest charging and weekly repayments describe different events. Record each separately, because an earlier principal repayment changes the balance on which subsequent interest accrues. Compare weekly repayment dates with the client’s cash receipts, rather than converting a monthly payment into four weekly payments.

Business loan rates in Australia reflect the security available and the risk the lender accepts. Cash flow, credit history and trading performance affect that risk. The amount, term and purpose also shape the facility and price.

CommBank’s BetterBusiness Loan page, current as at 15 May 2026, says rates and fees depend on individual circumstances. It identifies amount, term and security as pricing factors. The Letter of Offer confirms the rate.

Obtain that dated lender quote for your client before assigning a rate to the comparison.

An average business loan interest figure combines borrowers and facilities with different risks. Even an average for small businesses can’t establish this client’s approved price. Compare written offers using the same requested amount, fees and repayment assumptions.

Calculate Total Cost

Total borrowing cost is interest plus the charges needed to obtain, maintain and repay the facility. Keep that cost separate from total cash repaid, which also includes returning the principal.

Collect every applicable charge before calculating the total.

• Establishment or application fees paid upfront or added to the debt.
• Account, annual review or facility fees during the term.
• Broker fees payable by the client and their payment dates.
• Valuation, legal, registration and other security costs.
• Early repayment, discharge or exit charges under the proposed repayment date.

CommBank’s business loan preparation guide, as at October 2026, identifies establishment and ongoing fees. It also lists early repayment, exit and security valuation charges. Include only those that apply to the actual offer.

The following fictional schedules show the arithmetic for a $100,000 loan drawn in full, repaid over 36 months with equal month-end payments. Both have no balloon or redraw. All fees are assumed cash amounts including any applicable goods and services tax (GST), paid separately from principal.

Cost item	Schedule A	Schedule B
Amount advanced	$100,000	$100,000
Monthly loan payment	$3,200	$3,250
Total of 36 loan payments	$115,200	$117,000
Interest within those payments	$15,200	$17,000
Upfront charges	$2,000	$500
Account fee each month	$20	$0
Total interest and fees	$17,920	$17,500
Total cash repaid, including fees	$117,920	$117,500

Schedule A has $1,800 less interest, yet costs $420 more after fees. The example assumes unchanged payments and no exit charge. It shows how to compare supplied schedules, not prices available from a lender.

A shorter term usually requires principal to be returned faster. Test the larger payments against the client’s cash-flow forecast, even if total interest falls. A balloon reduces the principal returned in regular payments and leaves a lump sum due at maturity.

If a schedule has a $20,000 balloon, add that $20,000 to its regular payments when calculating cash repaid. Check whether the final instalment already includes it before adding it. Record how the client will fund the final payment without assuming refinancing will be approved.

When a fee is financed, include it in the opening debt and interest calculation. Don’t also count that financed fee as a separate cash payment. Compare costs before tax so an assumed deduction doesn’t change the loan ranking.

Test Cheap and Low-Interest Claims

A cheap business loan is the lowest suitable total-cost offer for the client’s requirements, within the offers compared. A low interest rate alone doesn’t establish that result.

Match the advertised offer to the client’s borrower type and business history. Check the required security, eligible amount and available term. A starting rate that requires property security doesn’t describe an unsecured application.

If an offer uses a business loan comparison rate, read its assumed loan amount and term. Identify the included fees and exclusions. Recalculate using this client’s expected drawdown and exit dates whenever those assumptions differ.

Use the same comparison period for each suitable offer. If one lender can’t provide the requested term, show that offer separately with its higher repayment demand. Describe the result as the cheapest among the suitable written offers compared.

Retain the dates and assumptions beside that result.

For refinancing, add charges in the old facility’s payout quote to the new facility’s setup costs. These can include an exit fee.

Business.gov.au’s refinancing guidance explains that interest savings must outweigh those costs. Calculate the saving over the period the client expects to keep the new facility.

Test Interest-Free Claims

An interest-free business loan can still have fees or a repayment deadline that changes its cost. Read the written promotion terms before treating a zero-interest period as free borrowing.

Record the exact period during which interest is waived. Identify which transactions qualify and whether fees apply during that period. If a subsidy pays the interest, establish who receives it and whether losing eligibility leaves the borrower paying interest.

Separate waived interest from deferred interest. For a deferred-interest offer, record whether interest accrues during the promotion and becomes payable later. Establish whether failing a payment or repayment deadline triggers interest from an earlier date.

Show the remaining balance when the promotion ends. Then obtain the contractual post-promotion rate and repayment schedule, including any required lump-sum payment. A client who can’t clear that balance needs the full later cost in the comparison.

A fictional $50,000 advance with no interest and a $2,000 mandatory fee still costs $2,000 to obtain. Its total cash repayment is $52,000 when the principal is fully returned. The example assumes the fee is paid separately and there are no other charges or interest triggers.

For a government interest-free business loan, identify the named program and its official terms. Compare eligibility, application dates and the repayment obligation with the client’s situation. The government grants and programs finder helps locate programs.

Distinguish grant funding from a loan that requires repayment.

Refer the Tax-Use Question

Yes, business loan interest can be tax deductible when the borrowed money is used to produce assessable income, subject to applicable tax rules. A business label on the loan doesn’t establish the deduction.

The Australian Taxation Office (ATO)‘s operating-expense guidance, updated 1 October 2026, includes interest on money borrowed for income production. It also includes borrowing to purchase income-producing assets. The guidance limits mixed business and private expenses to the business portion.

The ATO’s Taxation Ruling TR 95/25 explains the connection between interest and income-producing activity. The use of borrowed money is generally relevant, with all circumstances considered. Providing property as security doesn’t make privately used funds deductible.

For a simple fictional illustration, assume 80% of an unchanged loan funds income-producing business purchases and 20% funds private spending. If total interest is $10,000, the business-use share is $8,000 before any other tax restrictions. This illustration assumes no subsequent withdrawals, repayments or changes in use.

Mixed facilities need more than a year-end percentage estimate. Taxation Ruling TR 2000/2 explains apportionment for mixed-purpose lines of credit and redraw facilities. Its ordinary rule allocates principal repayments proportionately between income-producing and private use, with specified exceptions.

Send the client’s accountant the loan agreement and statements showing each drawdown. Include invoices and payment records tracing the funds, plus details of private use and later redraws. Ask the accountant to determine the deductible amount under current ATO rules and document the apportionment.

An interest deduction can reduce taxable income. It doesn’t return the whole interest expense to the client, and it doesn’t make principal repayment an interest deduction. Have the accountant calculate any tax effect separately from your borrowing-cost comparison.

Present a Client Comparison

Present property-secured commercial lending and unsecured business lending beside each other for the same funding need. Explain the cost difference alongside the security risk and funding deadline.

For example, a fictional trading business needs $100,000 for equipment, drawn in full on an agreed date and repaid over 36 months. Request monthly principal-and-interest repayments with no balloon for both facilities. The comparison below sets out what to record from each lender’s dated written terms.

Comparison item	Property-secured commercial facility	Unsecured business facility
Amount, purpose and term	$100,000 for equipment over 36 months	$100,000 for the same equipment over 36 months
Rate and pricing date	Record the quoted annual rate, fixed period or variable basis, quote date and expiry	Record the same information from the unsecured offer
Full repayment schedule	Record every monthly payment, interest total and any residual balance	Record the schedule using the same drawdown date and repayment pattern
Fees and total cash cost	Add applicable security costs and all other fees to the schedule	Add the unsecured facility’s applicable fees to the schedule
Security and guarantees	Name the property, mortgage priority and any guarantees required	Record any guarantee or other contractual obligations despite the unsecured label
Timing and conditions	Record valuation, documentation and drawdown requirements against the equipment payment deadline	Record assessment and drawdown requirements against the same deadline

CommBank’s secured and unsecured explanation, as at October 2026, says secured borrowing usually has a lower rate. The pledged asset gives the lender a source of recovery if the borrower can’t repay. That security can reduce lending risk, but exposes the client’s asset to sale on default.

The unsecured facility avoids the proposed property mortgage but can have higher interest. Security costs can also reduce the secured option’s saving on a small or short-lived facility. If the client plans to hold cash against the debt, compare business loan offset eligibility separately before assuming an offset saving.

Obtain fresh client-specific pricing from every lender before choosing. Mark any condition missing from a written offer as unresolved in your client comparison, and obtain the lender’s written answer. Recommend the suitable facility whose total cost, repayment demand and security obligations match the client’s funding need.