The short version
- The true cost of a business loan is interest plus every fee, measured over the period you actually hold the loan — not the headline rate.
- 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 hold it for only a year or two.
- Commercial finance generally has no regulated comparison rate. Unlike a home loan, a business loan is not required to show one — so the single-number shortcut consumers rely on is simply absent.
- Compare two loans on total cost over your real hold period. That is the only comparison that tells you which loan is actually cheaper.
Every business loan is sold on its interest rate. It is the number on the term sheet, the number the lender leads with, the number borrowers compare. It is also the wrong number to anchor on. The rate is one input into what a loan costs — and on a short hold, often not the largest. Fees, term and exit costs routinely decide which of two loans is genuinely cheaper, and they decide it in the opposite direction to the headline rate more often than most borrowers expect. This article sets out what a business loan actually costs, and how to compare two of them honestly.
Why the headline rate isn't the true cost
The headline interest rate tells you what the lender charges on the money — and nothing about what the loan costs you.
Those are different questions. The rate is an annual percentage applied to the balance. The cost is every dollar that leaves your account because you took the loan: interest, yes, but also the fee to set it up, the fees to keep it running, the costs of valuation and legals, and the fees to get out of it. On a long-held loan, interest dominates and the rate is a fair proxy for cost. On a short hold — a bridge, or a facility you intend to refinance — fees can be the larger share, and the rate becomes a poor guide.
There is also a structural reason the rate gets too much attention: it is the easiest number to quote and compare, so it is the number competition focuses on. A lender can advertise a sharp rate and recover margin through fees that never reach the headline — and broker commission sits in this picture too, which is how commercial finance brokers get paid. None of it is hidden, exactly — it is all in the offer documents — but it is not on the front page. It is also worth remembering that the rate is not fixed: it moves with the market, and the RBA cash rate reprices much of the lending market periodically, while a fee you paid on day one is sunk the moment it is charged.
The cost components most borrowers miss
A business loan's cost is assembled from components that sit outside the rate. Four of them matter most.
Establishment and upfront fees
An establishment fee is a one-off charge for setting the loan up, usually calculated as 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, and it is the single fee most likely to flip a rate comparison. A $7,000 establishment fee is roughly equivalent to a full year of a meaningful rate difference on a mid-sized loan — paid on day one, before the loan has done anything for you.
Ongoing fees (line, monthly admin, account-keeping)
Ongoing fees are charged for the life of the loan, regardless of the rate.
Two are common. A monthly admin or account-keeping fee — often somewhere between $25 and $100 a month — is small individually but compounds over a multi-year term. A line fee, charged on a line of credit, is larger and less intuitive: it is a percentage per annum of the facility limit, not the drawn balance, so you pay it on money you have not borrowed. On an undrawn or lightly used facility, the line fee can be most of what the facility costs.
Valuation, legal, and settlement costs
Valuation and legal costs are real costs of finance even though the lender does not keep them.
The borrower usually pays for the lender's valuation — a few hundred dollars for a straightforward asset, several thousand for complex commercial property — and for the lender's legal costs, often $1,000 to $3,000 or more, passed straight through. These are easy to leave out of a comparison because they are not "the loan", but they are money you spend to get the loan, and they belong in the total.
Exit costs and break fees
Exit costs are charged when you leave — and they are the fees borrowers forget most reliably.
A discharge or exit fee, often a few hundred to well over a thousand dollars, applies when you repay or refinance. On a fixed-rate loan, leaving early can also trigger break costs, which can be substantial and are hard to predict at the outset. Exit costs matter most for exactly the borrowers who plan to refinance — which is to say, the borrowers for whom fees matter most in the first place.
Why a comparison rate doesn't solve this for commercial finance
A comparison rate is meant to solve this exact problem — and for a commercial borrower, it largely is not available.
A comparison rate is a single percentage that combines the interest rate with most of the fees on a loan, so two loans can be compared on one number. It is an ASIC-defined consumer protection, and lenders must display it on consumer credit — 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 predominantly for business purposes generally sits outside the NCCP, which means there is usually no requirement to show a comparison rate on a commercial loan at all. The single-number shortcut a homebuyer takes for granted is, for a business borrower, simply not there.
And even where the concept applies, it has a known flaw worth understanding. A comparison rate annualises upfront fees across a standard loan term, so front-loaded fees distort it: on a short hold, a comparison rate understates the true bite of a large establishment fee, because it spreads that fee over years you will not actually hold the loan. It also excludes conditional costs — notably early-repayment and break fees — which are precisely the costs that hit a borrower who refinances. A comparison rate is a useful idea; it is not a substitute for working out your own total.
How to compare two business loans honestly
There is only one comparison that works: total cost — interest plus every fee — over the period you will actually hold the loan.
That last phrase is the one borrowers skip. A loan has a nominal term, but very few commercial loans run their full term; they are refinanced, repaid early, or restructured as the business changes. Comparing two loans over a ten-year term when you intend to refinance in two tells you almost nothing. Compare them over your real hold period.
Here is what that looks like. Take a $500,000 business loan, interest-only, 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 like the cheaper loan. Run the numbers over different hold periods and that breaks down.
At one year, Loan A costs $42,500 in interest plus $1,500 in fees — $44,000 in total. Loan B costs $39,000 in interest, plus a $7,500 establishment fee, plus $480 in monthly fees — $46,980. Loan A, the higher-rate loan, is cheaper by $2,980.
At two years, Loan A costs $85,000 plus $1,500 — $86,500. Loan B costs $78,000 plus $7,500 plus $960 — $86,460. They are line-ball: a $40 difference on a half-million-dollar loan.
At three years, Loan A costs $127,500 plus $1,500 — $129,000. Loan B costs $117,000 plus $7,500 plus $1,440 — $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 roughly two years. A borrower who refinances at eighteen months and chose Loan B for its rate has paid more, not less. The rate was real; it was just answering a different question than the one that mattered. Our finance calculators will do this arithmetic for your own numbers, and 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 — in three situations in particular.
The first is a short hold. If the loan is a bridge — finance taken to complete a deal and intended to be refinanced within a year or two — a low rate barely has time to matter, and a large establishment fee dominates. The worked example above is exactly this case: at an eighteen-month hold, the higher-rate, low-fee loan wins clearly. When you know the hold is short, weight fees over rate.
The second is a speed-critical settlement. A loan that funds in days rather than weeks often carries a higher rate, because speed is a service the lender prices. But if a slower, cheaper loan means missing the settlement date and losing the deal, the rate comparison is moot — the cheaper loan was never really available. This plays out across the six categories of business lender, where the faster categories consistently price above the banks.
The third is a deal that would not otherwise fund. If a higher-rate lender will write a deal a cheaper lender declines, there is no comparison to make. The relevant alternative to a higher rate is not a lower rate — it is no finance at all. Asset finance often shows this plainly: an asset finance facility approved quickly at a higher rate can be far more valuable than a sharper rate that arrives too late, or never.
In each case the rate is genuinely higher and the deal is genuinely cheaper — once "cheaper" is measured properly. If you want a deal assessed on total cost rather than headline rate, start an application and we will run the numbers with you.