The Interest Rate Is a Lie: What a Business Loan Actually Costs in 2026
Establishment fees, factor rates, simple vs APR — every layer that turns a 9% headline into something very different. Compare any two business loan products on equal footing.
The Interest Rate Is a Lie. Here's What Your Business Loan Actually Costs.
The advertised rate on a business loan tells you almost nothing about what you'll actually pay. The true cost of a business loan in Australia includes the interest rate, establishment fees (typically 0.5%–3%), ongoing account fees, and — on some products — a factor rate that locks in your total repayment from day one regardless of how quickly you pay it back. This guide breaks down every cost layer with worked maths examples so you can compare any two loan products on equal footing.
Why the Advertised Rate Is Almost Never the Real Rate
Lenders aren't lying when they advertise "from 7.49% p.a." — they're just not telling the whole story.
There are three ways the advertised rate obscures what you'll pay:
1. "From X%" only applies to the best borrowers. That 7.49% secured rate is for a borrower with strong financials, clean credit, quality security, and the right industry. As of May 2026, Money.com.au data shows secured business loans starting from 7.49% p.a. and unsecured from 14.45% p.a. — but the average rate actually charged sits between 17.20% and 17.35% p.a. The "from" rate is the floor, not the average.
2. The rate doesn't include fees. A headline rate of 9% p.a. with a 3% establishment fee on a $100,000 loan means you pay $9,000 before interest is calculated. That upfront cost changes your effective APR materially.
3. Business loans use different rate conventions. Some lenders quote a simple interest rate rather than an APR. These sound similar but calculate very differently. A 18.95% simple interest rate is equivalent to approximately 33.55% APR — nearly double the number.
The underlying issue: unlike home loans, business loans in Australia are not subject to the National Credit Code's comparison rate requirement. Consumer home loan ads must show a comparison rate. Business loan ads don't. Lenders have no legal obligation to convert their rate to a standardised comparable figure, so they don't.
The Three Rate Types You'll Encounter
1. Simple Interest Rate
A simple interest rate is calculated on the original principal only — it doesn't compound. The formula is:
Interest = Principal × Rate × Time
Example: $100,000 at 18.95% simple interest over 12 months = $18,950 in interest.
The problem: simple interest "flatters" the lender's product when you're making regular repayments. If you repay weekly, your outstanding balance is falling — but the simple interest calculation doesn't reflect that. The interest is charged as though you held the full $100,000 for 12 months even when, by month 6, you owe half that amount. An APR accounts for this declining balance effect. The simple rate of 18.95% converts to approximately 33.55% APR on an equivalent reducing-balance basis (based on Moula's published product data).
2. APR (Annual Percentage Rate)
APR is the honest number. It accounts for the declining balance effect of your regular repayments and is calculated using compound interest principles. When you're comparing two business loans, APR gives you a true apples-to-apples comparison — provided both figures include fees.
A loan with 18% APR will cost you more total interest than a loan with 18% simple rate because they're measuring different things. When someone tells you the APR, ask: "Does that include the establishment fee?"
3. Factor Rate
A factor rate is a multiplier applied to the original loan amount. It's used heavily in merchant cash advances and some short-term lenders.
A factor rate of 1.3 on a $20,000 loan means your total repayment is $20,000 × 1.3 = $26,000. The $6,000 is the total cost of borrowing — full stop.
This structure has one critical implication: early repayment does not reduce the total amount you owe. On a conventional interest-bearing loan, paying off principal early reduces future interest. On a factor rate loan, the $6,000 cost is locked in from day one. Pay it off in 3 months instead of 12 and you still owe $26,000 — but now your effective APR has roughly quadrupled.
Factor rates typically range from 1.1 to 1.5 in the Australian market.
The Fee Inventory: Every Charge a Business Loan Can Hit You With
Before you sign anything, get a written fee schedule. Here is every line item to ask about:
| Fee Type | Typical Range | Notes |
|---|---|---|
| Application / assessment fee | $300–$1,500 | May be charged even if declined |
| Establishment / origination fee | 0.5%–3% of loan amount | Prospa: 3%–3.5%; Scotpac LOC: 3% of facility limit |
| Monthly account-keeping fee | $10–$50/month | $30/month = $360/year on a 12-month loan |
| Annual review fee | $200–$500 | Common on lines of credit |
| Direct debit / payment processing fee | $1–$3 per transaction | Daily repayment schedules = ~$250/year at $1/draw |
| Early repayment fee | 1%–3% of outstanding balance | Some lenders waive; factor rate loans: irrelevant, full cost is fixed |
| Default / late payment fee | $50–$200 per event | Plus penalty interest on arrears |
| Line fee (overdrafts) | 0.5%–1.5% p.a. of approved limit | Charged on total facility, not drawn balance |
| Legal / settlement fee | $500–$1,000 | Applies to secured loans requiring mortgage registration |
| Valuation fee | $500–$2,000+ | Property-secured loans |
The line fee trap: on a business overdraft or line of credit, the line fee is charged on your total approved limit — not on what you've actually drawn. If you have a $200,000 overdraft limit with a 1% line fee but only ever use $50,000, you're paying $2,000 per year in line fees, not $500. This is one of the most commonly misunderstood costs in business banking.
The direct debit fee accumulation: a $2 direct debit fee doesn't sound like much. But on a daily repayment schedule over 12 months (roughly 260 business days), that's $520 in fees alone — on top of interest.
How to ask: Before accepting any offer, say: "Please provide the full fee schedule including all recurring fees, event-based fees, and any penalty fees in writing." Reputable lenders provide this without hesitation.
How to Convert a Factor Rate to an APR (Step-by-Step Example)
The conversion formula is straightforward once you know the repayment term.
Step 1: Calculate total repayment. $20,000 loan × 1.3 factor rate = $26,000 total repayment
Step 2: Calculate total cost. $26,000 − $20,000 = $6,000 total interest cost
Step 3: Calculate cost as a percentage of principal. $6,000 ÷ $20,000 = 30% total cost rate
Step 4: Annualise based on term.
- Over 12 months: 30% per year → but because repayments reduce your outstanding balance, the effective APR is approximately 60% (the rule of thumb: double the total cost rate for a 12-month reducing balance loan)
- Over 6 months: same $6,000 cost on a 6-month term = approximately 120% APR
The precise APR formula using the actuarial method:
APR ≈ 2 × n × F ÷ (P × (N + 1))
Where n = number of payment periods per year, F = total finance charge, P = principal, N = total number of payments.
For a $20,000 loan at factor rate 1.3 repaid daily over 6 months (~130 payments):
- F = $6,000
- P = $20,000
- N = 130
- n = 260 (daily payments, annualised)
This gives an effective APR of approximately 96.64% on a 6-month term — confirming why short-term factor rate products are expensive financing.
The takeaway: a factor rate of 1.25 sounds modest. Applied to a 6-month $20,000 loan, it's nearly 97% APR equivalent. Always convert before you compare.
How to Convert a Simple Interest Rate to APR
The relationship between a simple interest rate and APR depends on the repayment frequency and term. Here's the mechanics:
A simple interest rate assumes you hold the full principal for the entire term. An APR uses a reducing balance, reflecting that each repayment reduces the amount you owe.
For an 18.95% simple rate on a 12-month loan with monthly repayments:
- Monthly payment on $100,000 = ($100,000 + $18,950) ÷ 12 = $9,912.50
- Use the IRR (Internal Rate of Return) calculation to find the monthly rate that equates these payments to the $100,000 drawn.
- Monthly rate ≈ 2.80%
- APR = 2.80% × 12 = ~33.55% APR
In plain terms: a simple rate of 18.95% is the same as paying 33.55% APR. You're paying roughly 77% more than the number on the brochure implies. This figure comes from Moula's product disclosure, and it's a real-world example — not a hypothetical.
When a lender quotes you a simple interest rate, ask: "What is the APR on a reducing-balance basis including all fees?"
True Cost Worked Examples: Three Loans, Same $100,000 Amount
Here's how three $100,000 business loans compare when you do the actual maths:
| Bank Term Loan | Non-Bank Unsecured | Factor Rate Loan | |
|---|---|---|---|
| Amount | $100,000 | $100,000 | $100,000 |
| Rate/Factor | 9% p.a. | 18% p.a. + 2% estab. | 1.25 factor rate |
| Term | 3 years | 3 years | 12 months |
| Establishment fee | $500 | $2,000 | Nil (included in factor) |
| Monthly repayment | ~$3,180 | ~$3,620 | ~$10,417 |
| Total repaid | $114,480 | $132,320 | $125,000 |
| Total interest + fees | $14,980 | $32,320 | $25,000 |
| Effective APR | ~9.4% | ~20.5% | ~49%** |
| Early repayment savings? | Yes | Yes (check ERP fees) | No — cost is fixed |
**Factor rate APR based on 12-month reducing-balance equivalent.
What this table shows:
- The bank term loan is the cheapest by a large margin — but requires security and takes weeks to approve.
- The non-bank unsecured loan costs more than twice as much in total interest — but you can have funds in 24–48 hours with less documentation.
- The factor rate loan costs $25,000 on $100,000 — and if you repay in 6 months instead of 12, your total cost stays at $25,000 but your effective APR doubles.
Speed and accessibility cost money. The question is whether that cost is justified for your business situation.
What the National Credit Code Does and Doesn't Require for Business Loans
The National Credit Code (NCC), administered under the National Consumer Credit Protection Act 2009, protects consumers — not businesses.
What the NCC requires for consumer credit:
- Comparison rate disclosure
- Credit guide and credit proposal disclosure
- Responsible lending obligations
- Hardship provision rights
What applies to business loans: None of the above is mandatory for lending to businesses for business purposes. A lender extending a $500,000 business loan has no legal obligation to:
- Disclose a comparison rate
- Conduct a responsible lending assessment
- Offer hardship provisions in the same form as consumer loans
What protection you do have:
- The Australian Securities and Investments Commission Act 2001 prohibits unconscionable conduct and misleading or deceptive conduct — this applies to business lending.
- The Australian Financial Complaints Authority (AFCA) accepts complaints from small businesses (annual turnover under $5 million, credit exposure under $5 million).
- The ASBFEO (Australian Small Business and Family Enterprise Ombudsman) can assist with disputes.
- From July 2022, lenders subscribing to the Business Finance Guide and the ABA/AFIA small business code of conduct have voluntary disclosure obligations.
The absence of comparison rate requirements for business loans is not a loophole — it's a deliberate policy decision reflecting that businesses are considered sophisticated enough to conduct due diligence. That means the due diligence burden falls on you.
The Comparison Rate Problem: Why It's Designed for Home Loans, Not Business Loans
Even for home loans, where comparison rates are mandatory, the comparison rate has serious limitations. For business loans, those limitations become fatal to the concept.
What a comparison rate does: It combines the interest rate and most fees into a single annual percentage figure, calculated over a standardised $150,000 loan over 25 years. This makes it useful for comparing 25-year home loans of similar structure.
Why it fails for business loans:
-
Business loan terms vary from 3 months to 10 years. A comparison rate standardised to 25 years is meaningless on a 12-month loan — the fee amortisation period alone distorts the figure.
-
Short-term loans amplify fee impact. A $1,500 establishment fee on a $100,000 loan represents 1.5% of principal. Amortised over 25 years, it barely registers. Amortised over 6 months, it adds ~3% to the annualised cost.
-
Factor rate products can't be expressed as a comparison rate. The calculation methodology is incompatible with compound interest comparison rates.
-
Ongoing fees vary wildly. Monthly account fees, line fees, direct debit fees, and annual review fees differ so significantly between products that any standardised comparison would be misleading.
The practical implication: don't rely on a comparison rate for business loans even if a lender voluntarily discloses one. Run your own true cost calculation using the framework below.
How to Run Your Own True Cost Calculation (Framework)
Five steps. You need three pieces of information: the total repayment amount, the loan term, and a list of all fees.
Step 1: Get the total repayment figure in writing. Ask: "What is the total amount I will repay over the full term of this loan, including all interest?" Get this number confirmed in writing before proceeding.
Step 2: Calculate total interest paid. Total repayment − Principal = Total interest cost. Example: $126,000 repaid on $100,000 = $26,000 interest.
Step 3: Calculate the raw cost-as-a-percentage. $26,000 ÷ $100,000 = 26% total cost rate.
Step 4: Annualise to get your effective APR proxy.
- 3-year loan: 26% ÷ 3 = 8.67% per year (simple annualisation — apply the doubling adjustment for reducing balance: ×1.85 approximate) = ~16% effective APR
- 1-year loan: 26% per year → reducing balance adjustment: ~52% effective APR
- 6-month loan: 26% over 6 months → annualised: 52% → reducing balance: ~100% effective APR
Step 5: Add all fees. Compile: establishment fee + (monthly fee × number of months) + (direct debit fee × number of repayments) + any annual fees × years. Add the total fee amount to your Step 2 interest cost, then recalculate Steps 3–4.
Quick reference: reducing balance adjustment multipliers
| Loan Term | Adjustment Multiplier |
|---|---|
| 3 years | ×1.85 |
| 2 years | ×1.80 |
| 1 year | ×1.75 |
| 6 months | ×1.90 |
| 3 months | ×1.95 |
These are approximations based on standard monthly repayment schedules. Use an IRR calculator for precise figures.
Frequently Asked Questions
What is a factor rate and how is it different from an interest rate?
A factor rate is a simple multiplier applied to your loan principal. A factor rate of 1.3 on a $50,000 loan means you repay $65,000 — the $15,000 is your total cost, fixed at the start. An interest rate, by contrast, is charged on your outstanding balance over time, so paying down principal reduces future interest. With a factor rate, your total repayment is fixed regardless of how fast you pay.
How do I convert a factor rate to an APR?
Subtract 1 from the factor rate, divide by the loan term in years, then multiply by roughly 1.75–1.95 to adjust for the reducing balance effect. Example: factor rate 1.3 on a 12-month loan → 0.3 ÷ 1 = 30% → 30% × 1.75 = ~52.5% APR. For precision, use an IRR calculator with your repayment schedule.
Do business loans have comparison rates like home loans?
No. The comparison rate disclosure requirement under Australian credit law applies only to consumer credit regulated by the National Credit Code. Business loans are exempt. Lenders have no legal obligation to provide a comparison rate for business finance products, which is why running your own true cost calculation is essential.
What is a simple interest rate on a business loan?
A simple interest rate is calculated on the original loan amount for the full term, regardless of how much you repay. It differs from APR, which accounts for your declining balance as you make repayments. A simple interest rate of 18.95% is equivalent to approximately 33.55% APR on a 12-month loan with monthly repayments — nearly double the headline figure.
What fees should I always ask about before accepting a business loan offer?
Ask for a written fee schedule covering: establishment/origination fee (the biggest upfront cost), monthly account-keeping fee, direct debit/payment processing fee, early repayment fee, default and late payment fees, line fee (if it's a line of credit or overdraft), and any legal or valuation fees for secured products. Get this in writing before you receive a formal offer.
Why does it cost more to repay a factor rate loan early?
It doesn't cost more in dollar terms — the total repayment ($26,000 on a $20,000 × 1.3 loan) stays fixed whether you repay in 3 months or 12. But repaying early dramatically increases your effective APR because you pay the same dollar cost over a shorter period. There is no interest saving from early repayment with factor rate products, unlike conventional interest-bearing loans.
What's a "line fee" on a business overdraft?
A line fee is an ongoing charge based on your total approved overdraft or line of credit limit — not on what you've actually drawn. If your facility is $300,000 and the line fee is 1% p.a., you pay $3,000 per year regardless of whether you've drawn $10,000 or $300,000. This fee structure penalises businesses that have large facilities but use them sparingly.
How do direct debit fees add up on a short-term business loan?
Quickly. A $2 direct debit fee on a daily repayment schedule runs to approximately $500 per year (260 business days × $2). On a $50,000 loan, that's an effective fee load of 1% p.a. before you account for any other charges. Weekly repayment schedules cost ~$104/year at $2/draw — more manageable, but still worth calculating.
Is there a legal requirement for lenders to disclose all business loan fees upfront?
Not under the National Credit Code, which doesn't apply to business lending. However, ASIC's prohibition on misleading and deceptive conduct means lenders cannot actively hide material fees. Best practice: always request a full written fee schedule before signing. Lenders subscribed to the Australian Banking Association's Business Banking Code of Practice have voluntary disclosure obligations, but not all non-bank lenders are signatories.
What's the cheapest type of business loan when all fees are included?
Secured bank term loans are the cheapest all-in when you can qualify: secured rates from 7.49% p.a. as of May 2026, with the RBA's average outstanding small business bank rate at approximately 7.03% p.a. The tradeoff is security requirements, slower approval (1–4 weeks), and stricter eligibility. Unsecured non-bank loans range from 14.45% upward, with fees pushing effective APR to 20%–35%+. Merchant cash advances and factor rate short-term products carry the highest all-in cost: effective APR of 40%–120%+ depending on the term. If speed and accessibility matter more than cost, you pay for it.
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loangorilla.com.au is an Australian Credit Representative (ACR) of Access Lending Group, Australian Credit Licence 531308. Rates and information are current as of May 2026 and subject to change. This guide is general information only and does not constitute financial advice.
Run the numbers yourself
Plug your own figures into the relevant Australian business loan calculators before you sign anything:
- Business Term Loan Calculator
- Secured Term Loan Calculator
- Merchant Cash Advance Calculator
- Equipment Finance Cost Calculator
- Affordability & Stress Test Calculator
Related business loan options
Compare current rates and lender lists for the business loan types most relevant to this guide: