Table of Contents
Quick Look Summary
- Typical loan amounts: $5 000 – $500 000 unsecured; some specialist lenders go to $2 million with partial security
- Funding speed: as little as same‑day for smaller deals; same‑day up to 7 business days for larger facilities most fund inside a week
- Repayment terms: 3 – 36 months (cash‑flow loans); secured terms can run 12 – 60 months
- Security: generally unsecured but near‑universal director guarantees; larger limits trigger a GSA (general security agreement)
What Counts as a Business Loan?
When most people say small business loan, they’re usually referring to cash in the bank, money for payroll, inventory, marketing, tax or plain old breathing room.
Technically speaking, a business loan can cover other types of loans like Chattel Mortgages, however they are usually categorised as Asset Finance or Equipment Finance.
What you think of business loans, we in the industry call cash flow finance. Cash flow finance is what this article will mainly focus on.
Cash‑flow loans put pure cash in your operating account.
Equipment finance, vehicle chattel mortgages and property‑secured commercial loans sit in a different lane; we’ll link to separate guides.
Common Cash‑Flow Loan Flavours
Within cash flow finance, there are many variants. Whilst they are different, broadly speaking they follow the same principles. I’ve listed them below, but for the majority of this article I’ll refer to them as one collective unit.
- Unsecured Term Loan (3‑36 mo): Fixed daily or weekly repayments.
- Line of Credit / Overdraft: Revolving limit; pay interest only on what you draw.
- Invoice Finance: Advance 70‑90 % of an issued invoice; balance on debtor payment.
- Merchant Cash Advance: Lump sum today, repaid from a fixed % of daily card sales.
Confusion with Interest Rates
Interest rates on a business loan DO NOT work in the same way as interest rates on a home loan.
Three moving parts muddy the water:
- The language of price – APR, simple %, or factor rate.
- Term length – loans shorter than 12 months vs those longer.
- Repayment rhythm – daily vs weekly vs monthly debits.
Sometimes lenders exploit the confusion (quoting the friendliest number and hoping you don’t dig deeper).
Other times the complexity is just baked into how short‑term finance works. The rest of this section unpacks the three ingredients so you can spot genuine apples‑to‑apples costs.
APR vs Simple % vs Factor Rate
Annual Percentage Rate (APR) is what most borrowers picture when they hear interest rate.
Under the National Consumer Credit Protection Act, the government mandate comparison rates be quoted on any consumer lending. This comparison rate is an APR.
Since business loans are not regulated under NCCP, they need not compare loans this way. Instead you’ll often find business loans quoted as a “factor rate” or “simple interest”.
Below we compare the three dialects using one consistent loan scenario: $50 000 over 12 months, repaid monthly.
The monthly repayment is exactly the same; only the pricing dialect changes.
| Dialect | Quoted Cost (12‑mo term) | Monthly Repayment | What It Really Means |
|---|---|---|---|
|
APR |
40 % p.a. |
$4,958 |
Annualises all costs; ideal for ≥ 12-month loans |
|
Simple % |
19% simple interest |
$4,958 |
One‑off fee on starting balance; same repayment as factor |
|
Factor Rate |
1.19 factor rate |
$4,958 |
Identical 19 % flat fee expressed as a multiplier; cost locked day 1 |
Obviously, quoting someone 19% interest sounds a lot better than quoting 40% interest. However, the key is whether it is a simple interest rate or an APR.
Now, for terms over 12 months, if a lender quotes simple interest only, they are likely being misleading on purpose.
However, once the term drops below 12 months, the APR maths gets confusing. In this instance, it’s not always the lender’s fault.
More Than 12 Months vs Less Than 12 Months
APR starts to wobble under a year because it stretches a short‑term fee across 12 months. That exaggerates the percentage even though the dollar cost may be perfectly reasonable. This isn’t automatically lender trickery; it’s the maths of annualising a cost you’ll pay off in half that time.
To illustrate how everything gets wacky, let’s look at two $50,000 loans, both paying back $5,000 worth of interest. One is over 6 months, the other is over 12 months.
| Term | Monthly Repayment | Total Interest | Effective APR |
|---|---|---|---|
|
6 months |
$4,383 |
$5,000 |
≈ 37 % |
|
12 months |
$9,167 |
$5,000 |
≈ 11 % |
Whilst the term only doubles (or halves, depending on how you look at it), the interest rate almost quadruples!
The primary issue lies in the “A” of APR, which is Annual. When you take the cost of a loan with a term of, for instance, three or six months and extrapolate it over a full year, the resulting percentage can be disproportionately high and misleading. It creates a “sticker shock” that doesn’t accurately reflect the total cost of the loan in dollar terms.
Imagine paying $20 for a two-hour movie ticket. If you were to “annualise” that cost, it would be the equivalent of spending over $87,000 a year on movies, which is a nonsensical and unhelpful comparison. Similarly, an APR for a short-term loan can create an exaggerated perception of the cost.
Monthly vs Weekly vs Daily Repayments
It’s very common for short-term business loan providers to ask for repayments weekly or even daily.
However, this difference in payment deductions can actually change your interest rate.
Let’s look at an example similar to the earlier one: $50,000 over 12 months, repaid monthly.
| Repayment Rhythm | Repayment Amount | Total Interest Paid | APR |
|---|---|---|---|
|
Monthly |
$4,958 |
$9,500 |
40% |
|
Weekly |
$1,144 |
$9,500 |
36.74% |
|
Daily |
$229 |
$9,500 |
36.18% |
The dollar cost is identical, and the APR swing mainly reflects how soon your cash departs, not some hidden extra charge.
The problem arises because in Australia, due to the National Credit Code, we are so used to seeing the Nominal APR being quoted.
Whilst the APR works well when the repayments are monthly, it does not work well when the repayments are not.
On a loan with daily repayments, a small business lender can quote a lower APR, however it’s just a mathematics trick.
Actual Interest Rates & Costs
Interest Rates
The absolute lowest you can get is 13% – 14% APR. That would be considered a fantastic rate on a business loan, however, I’ve never been able to get a client to qualify for that type of rate.
In order to qualify you usually need yearly revenue more than $10M and have 800+ credit scores. These types of businesses a few and far between.
A more realistic range of interest rates is between 18% – 30% APR, with high risk borrowers rates easily jumping to 49%.
The final resort lenders do not quote APR and they do not do terms longer than 6 months (so they don’t quote APRs). In these situations I’ve personally seen factor rates of 1.5 over 4 months, which is crazy high! On the flip side, they will cater to borrowers with credit scores as low as 200 in some instances.
Furthermore, throughout all the RBA rate changes, I haven’t seen business loan rates move that much. Since the financier’s margins are so high, I personally think the rate changes don’t really affect them all that much.
Fees
Drawdown Fees
Lenders will typically charge some form of drawdown fee. Different lenders refer to it differently but in practice is works the same. A fixed amount is debited from the amount
So for example if you are borrowing $50,000 and the drawdown fee is $1,000, you will receive $49,000 in your account.
You will hardly ever receive the full approval amount into your account.
Early Payout Fees
Paying the loan out early rarely saves money. You’ll be asked to clear the remaining scheduled instalments in one go.
This is particularly problematic when refinancing. You’ll be payout out the old interest with the new loan. Stacking on a new fee on top of the old one, creating “interest on interest.”
Approval Process
Decision matrix
Generally speaking, an algorithm or matrix decides whether you are approved or declined. They key levers are:
- Bank statements data: This does 80% of the heavy lifting.
- ATO debt or late BAS will cost you: either a pricing premium or a straight decline.
- Industry Classification: Some sectors hit an invisible ceiling long before the credit score does.
- Credit Score: Not only personal credit scores, but business ones as well.
Bank Statements
Bank statement data is at the core of all approvals these lenders give out. Lenders pull read-only data via an API (most use Illion, Proviso or Yodlee).
You will need to login to your bank account via a separate link. This is common practice in the industry, but everyone many people think that it is a shady practice designed to steal their bank account details. This is not the the case, however I personally sympathise with those who think that way.
Unfortunately, giving the lender PDFs is usually not an option and if you want to apply for this sort of loan, the process is something you’ll need to get comfortable with.
Approvals are usually based on a multiple of average monthly turnover. The exact percentage scales up and down depending on other factors.
For example, a high quality borrower may receive 150%. So if they are generating $100,000 in monthly sales, the lender will approve them for $150,000.
If the bank statement flags daily balance dips, overdrafts or ATO hits there can also be a reduction in the percentage rate applied.
Other Data
Once the bank statements are assessed, to decide what exact percentage to apply other factors are also looked at:
- BAS & ATO Portal: late lodgements or tax debt = auto risk‑grade down.
- Credit Bureau: director & entity scores; recent enquiries. The lower the score, the lower the percentage.
- Industry Overlays: There are restricted sectors (adult, gambling, primary ag, ride‑share, crypto) that face tighter caps.
- AML KYC checks: Nothing to do with how much you will get approved, but all shareholders >25% will need to be identified and if there is a trust there will be further checks.
What Happens If You Can’t Pay?
Timeline
- Day 1‑7: Collections team calls, direct‑debits retry.
- Day 8‑30: External collections, demand letters, default added to commercial bureau.
- Day 31‑60: Statutory demand, legal fees capitalised, potential director‑guarantee enforcement.
- 60+ days: Creditor’s petition → court‑ordered liquidation.
Are cash-flow loans predatory?
I get Insolvency Notices delivered daily from support@insolvencynotices.com.au. Almost every day, I see cash‑flow lenders winding up a new company.
There is chatter in the industry that some lenders take it too far. Especially the ones who charge higher fees over shorter periods of time. One could argue that they are not helping the borrower out with cash flow; they are purposely digging them into a hole.
For the time being though, they are operating within the law. Commercial loans is an unregulated space and there is no formal ombudsman. You can try complain to AFCA if the lender is a member, however this will only be the case if they also provide consumer loans. The lenders that would be considered predatory are almost certainly not members of AFCA.
Regardless of whether this is true or not, once you have done a deal with one of these lenders, be prepared to be treated with a certain “flavour”. Default rates for these loans are high, and the lenders are playing a numbers game. Their patience will wear thin very quickly, and it could impact your credit file or even the existence of your business altogether.
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