The short version
- The true cost of a business loan is interest plus every fee, over the time you actually hold the loan. The headline rate is only part of it.
- A loan with a higher rate and low fees can cost less than a lower-rate loan with thousands of dollars in upfront fees, if you only hold it for a year or two.
- Commercial finance generally has no regulated comparison rate. A home loan has to show one. A business loan doesn't, so the one-number shortcut consumers use isn't there.
- Compare two loans on total cost over the time you'll really hold them. That tells you which loan is cheaper.
Every business loan is sold on its interest rate. It's the number on the term sheet, the number the lender leads with and the number borrowers compare. It's also the wrong number to start with. The rate is one part of what a loan costs, and on a short hold it's often not the biggest part. Fees, term and exit costs often decide which of two loans is cheaper, and they point the other way from the headline rate more often than most borrowers expect. Below is what a business loan really costs, and how to compare two of them fairly.
Why the headline rate isn't the true cost
The interest rate tells you what the lender charges on the money. It doesn't tell you what the loan costs you.
The rate is a yearly percentage charged on the balance. The cost is every dollar that leaves your account because you took the loan. That's interest, plus the fee to set it up, the fees to keep it running, valuation and legal costs, and the fees to get out. On a loan you hold for a long time, interest is most of the cost and the rate is a fair guide. On a short hold, like a bridge or a facility you plan to refinance, fees can be the bigger share and the rate tells you much less.
The rate also gets too much attention because it's the easiest number to quote and compare, so that's where lenders compete. A lender can advertise a sharp rate and make its margin back through fees that never show in the headline. Broker commission sits in this picture too, which is how commercial finance brokers get paid. None of it is hidden. It's all in the offer documents, just not on the front page. The rate also moves with the market. The RBA cash rate reprices much of the lending market from time to time, while a fee you paid on day one is gone the moment it's charged.
The cost components most borrowers miss
Most of a business loan's cost sits outside the rate. Four parts matter most.
Establishment and upfront fees
An establishment fee is a one-off charge to set the loan up. It's usually a percentage of the loan amount, sometimes capped.
On a commercial deal it can run from a few hundred dollars to well into the thousands. It's the fee most likely to flip a rate comparison. A $7,000 establishment fee is about the same as a full year of a decent rate difference on a mid-sized loan, and you pay it on day one.
Ongoing fees (line, monthly admin, account-keeping)
Ongoing fees are charged for the life of the loan, whatever the rate.
Two are common. A monthly admin or account-keeping fee, often somewhere between $25 and $100 a month, is small on its own but adds up over a term of several years. A line fee, charged on a line of credit, is bigger and less obvious. It's a yearly percentage of the facility limit, not the amount you've drawn, so you pay it on money you haven't borrowed. On a facility you barely use, the line fee can be most of what it costs.
Valuation, legal, and settlement costs
Valuation and legal costs are real costs of the finance, even though the lender doesn't keep them.
You usually pay for the lender's valuation. That's a few hundred dollars for a simple asset, or several thousand for complex commercial property. You usually pay the lender's legal costs too, often $1,000 to $3,000 or more. These are easy to leave out of a comparison because they aren't "the loan". But you spend the money to get the loan, so they belong in the total.
Exit costs and break fees
Exit costs are charged when you leave, and they're the fees borrowers forget most often.
A discharge or exit fee, often a few hundred dollars to well over a thousand, applies when you repay or refinance. On a fixed-rate loan, leaving early can also trigger break costs. These can be large and are hard to predict at the start. Exit costs hit hardest for borrowers who plan to refinance, and those are the same borrowers for whom fees matter most anyway.
Why a comparison rate doesn't solve this for commercial finance
A comparison rate is meant to fix this exact problem. For a business borrower, it mostly isn't available.
A comparison rate is one percentage that combines the interest rate with most of a loan's fees, so you can compare two loans on one number. It's an ASIC-defined consumer protection. Lenders must show it on consumer credit, like home loans and personal loans, under the National Consumer Credit Protection Act.
Most commercial finance is exempt from that Act. A loan taken wholly or mainly for business purposes generally sits outside the NCCP. So there's usually no rule that a commercial loan has to show a comparison rate at all.
Even where it does apply, it has a known flaw. A comparison rate spreads upfront fees across a standard loan term. On a short hold, that understates how much a big establishment fee really costs you, because it spreads the fee over years you won't hold the loan. It also leaves out conditional costs, like early repayment and break fees, which are the costs that hit a borrower who refinances. It's a useful idea. It doesn't replace working out your own total.
How to compare two business loans honestly
Only one comparison works: total cost, meaning interest plus every fee, over the time you'll actually hold the loan.
Borrowers skip that last part. A loan has a set term, but very few commercial loans run the full term. They get refinanced, repaid early or restructured as the business changes. Comparing two loans over a ten-year term when you plan to refinance in two tells you almost nothing. Compare them over your real hold period.
Here's an example. Take a $500,000 interest-only business loan that you expect to refinance within a couple of years. Two offers:
- Loan A: 8.5% interest, a $1,500 establishment fee, no monthly fees.
- Loan B: 7.8% interest, a $7,500 establishment fee, and a $40 monthly account fee.
Loan B has the lower rate, so it looks cheaper. Run the numbers over different hold periods and that falls apart.
At one year, Loan A costs $42,500 in interest plus $1,500 in fees, so $44,000 in total. Loan B costs $39,000 in interest, plus a $7,500 establishment fee, plus $480 in monthly fees, so $46,980. Loan A, the higher-rate loan, is cheaper by $2,980.
At two years, Loan A costs $85,000 plus $1,500, so $86,500. Loan B costs $78,000 plus $7,500 plus $960, so $86,460. They're line-ball: a $40 difference on a half-million-dollar loan.
At three years, Loan A costs $127,500 plus $1,500, so $129,000. Loan B costs $117,000 plus $7,500 plus $1,440, so $125,940. Now Loan B, the lower-rate loan, is cheaper by $3,060.
The lower rate does win, but only once you hold the loan past about two years. If you refinance at eighteen months and picked Loan B for its rate, you paid more. Our finance calculators will run this for your own numbers. A broker should do it as a matter of course, across the bank and non-bank options, before recommending anything.
When a higher rate is the cheaper deal
A higher rate is the cheaper deal more often than borrowers expect. It happens in three situations.
The first is a short hold. If the loan is a bridge, taken to complete a deal and refinanced within a year or two, a low rate barely has time to matter and a big establishment fee takes over. The example above is exactly this: at an eighteen-month hold, the higher-rate, low-fee loan wins clearly. When you know the hold is short, give fees more weight than the rate.
The second is a settlement that has to happen fast. A loan that funds in days rather than weeks often has a higher rate, because the lender charges for speed. But if a slower, cheaper loan means you miss settlement and lose the deal, the cheaper loan was never really on the table. You see this across the six categories of business lender, where the faster categories price above the banks.
The third is a deal that wouldn't fund anywhere else. If a higher-rate lender will write a deal a cheaper lender turns down, there's nothing to compare. Your real choice is a higher rate or no finance at all. Asset finance often shows this clearly: a facility approved quickly at a higher rate can be worth far more than a sharper rate that arrives too late, or never.
In each case the rate is higher and the deal is still cheaper, once you measure cost properly. If you want a deal assessed on total cost rather than headline rate, start an application and we'll run the numbers with you.