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Why the interest rate on your business loan looks different to your home loan rate

It shouldn’t come as much of a surprise that if you haven’t sat down and compared your home loan vs business loan paperwork, you might be surprised to learn that interest rates for business loans tend to differ quite a bit from home loans. If you want to make more informed financial decisions and effectively manage your business's borrowing costs, it’s important to understand the disparity – and what influences it.

Different risk profiles

There are distinct risk profiles associated with both business loans and home loans – and they don’t usually align with each other. Home loans are typically secured by real estate, offering lenders a lower risk level. Whereas business loans can be unsecured or secured by business assets, which are considered riskier collateral. As such, lenders are more likely to charge higher interest rates for business loans to compensate for the increased risk they take on.

Business cash flow and financial statements

Unlike home loans, where lenders primarily rely on the borrower’s personal income and creditworthiness, business loans are evaluated according to the financial health of the company itself. Lenders will assess things like business cash flow, profit margins, financial statements and more to determine their ability to repay the loan.

What that means is that businesses with a consistent, healthy cash flow are more likely to secure lower interest rates – after all, they present a lower risk of default. On the other hand, companies with unpredictable or volatile revenue streams may face higher interest rates to offset the lender's risk exposure.

Industry and economic factors

Did you know that interest rates for business loans can be influenced by industry-specific and macroeconomic factors? It isn’t something that usually factors in to home loan rates.

Certain industries are perceived as being riskier than others due to their inherent volatility or susceptibility to market forces. Businesses operating in the hospitality or construction sectors, and especially startups (no matter the industry), can therefore face higher interest rates due to their higher risk profile.

In addition to that, changes to the overall economic climate – including interest-rate hikes from the RBA or increasing inflation levels – can negatively affect borrowing costs for businesses.

Amount borrowed and duration of the loan

Depending on your loan amount and the length of the contract, interest rates will generally differ between home and business loans. Home loans are usually taken out for longer periods of time, allowing lenders to spread their risk and offer more competitive interest rates.

By contrast, smaller business loans with shorter repayment periods often mean higher interest rates, as lenders will need to cover their costs and stay profitable in case of a number of adverse outcomes.

Credit history and financial stability

Just as with home loans, your credit history and financial stability play a vital role in the interest rate you are offered for a business loan. Lenders take into account things like your business credit score , existing debt, as well as any past defaults or bankruptcies. A solid credit history and strong business cash flow will demonstrate your ability to manage debt responsibly and increase your chances of securing a lower interest rate.

“Understanding the factors that contribute to the difference in interest rates between commercial loans and regular home loans is something all Australian business owners should be aware of,” says David Crook, Managing Director at Nero Financial. “Just remember that each lender will have their own criteria for determining interest rates, so work with an experienced commercial broker who can compare offers from multiple providers.”

Being proactive and well-informed can help you secure the best possible loan terms for your business, ensuring its continued growth trajectory. Speak to the experts at Nero Financial or call us on 1300 025 949 to get started today.