Business loans and overdrafts explained

A business loan is credit provided to fund a business: buying stock or equipment, covering a cash flow gap, acquiring premises or another business, or refinancing existing business debt. Three things set it apart from a personal loan or home loan.

The first is regulation. Credit provided wholly or predominantly for business purposes generally falls outside the National Credit Code, and a loan to a company is outside it whatever the purpose. Business lenders are not bound by the consumer responsible lending obligations, are not required to publish a comparison rate, and set their own terms within the general law, the unfair contract terms rules for small business and, for subscribing banks lending to a small business as the Code defines it, the Banking Code of Practice.

The second is pricing. Many business loans are priced individually, by reference to the business’s financials, the security offered and the wider banking relationship. A published rate is often the starting rate for that product, the rate that applies to the strongest security, or a point from which the rate is negotiated.

The third is security. Business lenders take a wider range of security than home lenders: commercial property, residential property owned by the business owners, the business’s assets, a general security interest over everything the business owns, cash deposits, and personal guarantees from directors.

A business term loan is a fixed amount, borrowed once and repaid over a set term. Terms vary widely, from unsecured loans of a year or two to secured loans of 15 years or more. The main choices within a term loan are the same as on a home loan:

• Variable or fixed rate. Variable rates move with the lender’s business reference rates. Fixed rates lock the rate for one to five years, and breaking a fixed rate early can carry a break cost.
• Principal and interest or interest only. Interest-only periods are more common on business loans than personal ones, particularly where the asset is expected to generate the income that repays the debt.
• Secured or unsecured. Unsecured business loans are available for smaller amounts and shorter terms, at noticeably higher rates. Secured loans carry lower rates in proportion to the strength of the security.

Business term loan feeds also publish features familiar from home loans. Redraw and extra repayments appear on a large share of them, and some carry an offset account, digital banking access and a relationship manager. The fees that business loan feeds publish most often are establishment fees, ongoing service or account fees, and early repayment or exit fees on some products, along with event fees for valuations, variations and documentation.

A commercial property loan finances offices, shops, warehouses, industrial sites, medical suites and other non-residential property. A business buying its own premises borrows against the property it occupies, and an investor borrows against property leased to tenants. Current loans are listed on the Commercial Property Loans page.

Commercial property loans differ from home loans in ways that affect the cost:

• Lower loan-to-value ratios. Lenders commonly lend up to 65% to 80% of a commercial property’s value, depending on the property, the documentation and the loan size, compared with 80% to 95% on a home.
• Pricing by documentation and risk. Specialist lenders publish separate products for full documentation, alternative documentation and lease documentation loans, where the lease income on a tenanted property supports the application, and for prime and near-prime borrowers.
• Shorter terms and reviews. Terms are commonly shorter than 30 years, and some facilities are reviewed annually or every few years, with the lender able to reset terms at review.

A self-managed super fund can also borrow to buy commercial property under a limited recourse borrowing arrangement, where the property is held in a separate trust and the lender’s recourse is limited to that property. A number of lenders publish SMSF commercial property loans, listed on the SMSF Loans page, some at lower maximum loan-to-value ratios than ordinary commercial loans, and the borrowing must meet the superannuation law requirements for these arrangements, including, for an arrangement entered into on or after 10 August 2026, that the property is business real property, used wholly and exclusively in one or more businesses, and stays so for the life of the arrangement. Lending to SMSFs is a specialised area in which the fund’s trustee usually has independent advice.

A business overdraft is a credit limit attached to a business transaction account. The account can go below zero up to the limit, and the balance is repaid as money comes in. It is designed for short-term working capital: covering the gap between paying for stock or wages and receiving payment from customers. Current overdrafts are listed on the Business Overdrafts page.

Overdraft pricing usually has two parts. Interest is charged on the amount drawn, at a variable rate, usually calculated daily and charged monthly. Many lenders also charge a line fee on the approved limit, whether or not it is used, as the cost of keeping the facility available, and others charge a flat monthly or annual facility fee instead. Major bank line fees are commonly quoted as a percentage per year of the limit, charged monthly. An establishment fee usually applies when the overdraft is set up or increased, and some lenders charge an annual review fee.

Overdrafts can be secured or unsecured. Unsecured overdrafts are available for smaller limits at higher interest rates, while secured overdrafts use property or other assets and carry lower rates. Many overdrafts are reviewed periodically, and the lender can reduce the limit or require repayment at review, subject to any notice periods in the contract. An overdraft can also be repayable on demand under its terms, and under the Banking Code of Practice a bank may not need to give notice before it requires repayment of an overdraft or on-demand facility.

A business line of credit works in a similar way, but sits in a separate loan account rather than in the transaction account. Lines of credit are often used for larger working capital facilities and are commonly secured by property.

Larger business facilities are often priced at a margin over a market reference rate rather than at the bank’s own variable rate. A bank bill business loan sets the interest rate for each drawdown period, often 30, 90 or 180 days, at the prevailing bank bill swap rate plus a margin agreed for the business, and a line fee applies to the facility limit. When each period ends, the rate resets to the market rate for the next period.

This structure passes market movements through to the borrower directly and is used mainly for facilities of several hundred thousand dollars and above. Feeds from some of the major banks and some regional banks publish bank bill and market rate loans, generally without a published rate because the margin is negotiated.

A bank guarantee is a written undertaking from a bank to pay a named beneficiary up to a set amount if the business fails to meet an obligation. The most common use is a commercial lease, where the landlord accepts a guarantee in place of a cash bond. Guarantees are also used for supplier contracts, construction contracts and government tenders.

The bank issuing the guarantee is exposed if the beneficiary calls on it, so it requires security, usually a cash deposit equal to the guarantee amount held in a term deposit, or property. Pricing is usually an issuance fee plus an ongoing fee calculated as a percentage per year of the guarantee amount. If the business meets its obligations, the guarantee expires or is returned without any payment being made.

Trade finance covers the products importers and exporters use to manage the gap between paying for goods and receiving them, and the risk of dealing with overseas parties: letters of credit, import and export loans, and documentary collections. Few trade finance products are published in the CDR feeds because most are priced to the transaction.

Without a mandatory comparison rate, comparing business loans means reading the rate and the fees together:

1. The interest rate and whether it is variable, fixed or market-linked, and for which security type it applies.
2. Establishment, ongoing, line and review fees, which on a smaller loan can add more to the cost than a difference in rate.
3. The security required, including whether residential property, a general security interest or personal guarantees are part of the deal.
4. The maximum loan-to-value ratio on property-secured loans.
5. Repayment flexibility: extra repayments, redraw, offset, interest-only periods and early repayment costs.
6. Review and default terms: how often the facility is reviewed, what financial covenants apply and what the lender can do at review.

Current business loans are listed on the Business Loans page. Lending for vehicles and equipment is usually cheaper and simpler through asset finance, covered in the guide to equipment finance and leasing, with current products on the Equipment Finance page.