How do business loan repayments work?

A business loan repayment is the regular amount you pay the lender. It usually covers the interest charged since your last repayment plus part of the principal, which business.gov.au defines as “how much of the original amount is still owing on a loan (excluding the interest portion)”. What you pay each time, and in total, depends on four choices: how often you pay, how the loan is structured, whether the rate is fixed or variable, and whether there is a balloon.

Daily, weekly, fortnightly or monthly repayments

Lenders set a repayment frequency when you take out the loan.

• Daily repayments are usually debited every business day. They are common with short-term cashflow loans. They match businesses with steady daily takings but can strain accounts with lumpy income.
• Weekly or fortnightly repayments are common with cashflow term loans. Watch for months with five weekly debits.
• Monthly repayments are typical for bank term loans, secured loans and equipment finance. They are easier to plan around a monthly cycle of invoices, rent and payroll.

More frequent repayments reduce the balance a little faster. If interest is charged on the outstanding balance, that can reduce total interest slightly. But some short-term loans charge a fixed total cost that does not change with frequency. Always compare the total amount repayable.

Business loans without daily repayments

If daily debits do not suit your cash flow, you have options. Ask about repayment frequency before you apply, because it is often fixed by the product.

• Term loans with weekly, fortnightly or monthly repayments. Many cashflow and bank term loans offer these, particularly for larger amounts or longer terms.
• Secured loans. Loans backed by property or other assets usually have monthly repayments and longer terms. See secured vs unsecured business loans.
• Equipment and vehicle finance. These are usually repaid monthly, sometimes with a balloon.
• Lines of credit. You usually pay interest on what you have drawn and repay the balance as cash comes in. Some have minimum monthly repayments. See line of credit vs term loan.
• Invoice finance. Advances are repaid when your customers pay their invoices. See what is invoice finance.
• Trade finance. Each drawing is usually repaid in one amount at the end of its term. See what is trade finance.

Principal and interest, interest-only and capitalised interest

Principal and interest

Each repayment covers that period’s interest plus some principal. Early on, more of each repayment goes to interest. As the balance falls, more goes to principal. By the end of the term, the loan is fully repaid.

Interest-only

For an agreed period, you pay only the interest, so the balance does not go down. Moneysmart’s guidance on interest-only home loans explains the same principles that apply here: repayments are lower during the interest-only period, but they go up when it ends because the full principal must then be repaid over a shorter time. You also pay more interest overall. Interest-only periods can suit a business with a short, known gap before income starts, such as a new fit-out.

Capitalised interest

Some loans, often short-term or construction-style loans, add interest to the loan balance instead of collecting it in regular repayments. You make no repayments, or smaller ones, during the loan. The balance grows, and later interest is charged on the larger balance. You repay the principal and all capitalised interest at the end, often from a sale or refinance. Plan exactly how you will repay that larger final amount.

Fixed or variable

business.gov.au describes a fixed rate as one that “doesn’t change over the term of the loan (or for an agreed timeframe)” and a variable rate as one that changes with market conditions.

• Fixed. Your repayments are predictable, which helps with budgeting. But as Moneysmart notes, you miss out if rates fall, and fixed loans may limit extra repayments and charge break fees if you repay early.
• Variable. Your repayments can go down or up. Variable loans more often allow extra repayments and are often easier to refinance.

Many short-term business loans have a fixed total cost set at the start. Longer secured loans are more likely to offer a choice.

Balloon or residual payments

business.gov.au defines a balloon payment as “a final lump sum payment due on a loan agreement”. Part of the principal is set aside and repaid in one amount at the end, which makes regular repayments lower. With equipment finance and hire purchase, this is often called a residual.

The trade-off is that you pay interest on the balloon amount for the whole term, and you must have a plan to pay it: cash, refinancing or selling the asset.

A worked illustration

This is an illustration only. The numbers are rounded, do not include fees and are not a rate or an offer from any lender. Use the business loan repayment calculator to model your own figures.

How frequency changes each repayment

Say you borrow $60,000 and the total amount repayable over 12 months is $72,000.

Frequency	Number of repayments	Each repayment (approx.)
Monthly	12	$6,000
Weekly	52	$1,385
Daily (business days)	about 260	$277

The total is the same in this simplified illustration, but the effect on your bank account is not. A month with 22 business days has about $6,090 of daily debits. A month with five weekly debits has about $6,925.

How structure changes the principal you repay

Say you borrow $100,000 over five years (60 months). This table shows only the principal part of the repayments. Interest comes on top.

Structure	Principal repaid each month (average)	Owing at the end
Principal and interest	about $1,667	$0
12 months interest-only, then principal and interest	$0 for 12 months, then about $2,083	$0
$30,000 balloon	about $1,167	$30,000 balloon

The interest-only and balloon options lower repayments at some point, but in each case more principal stays outstanding for longer, so you pay more interest overall.

Early repayment

Repaying early can save interest, but check the contract before you do it.

• Fixed-rate loans may charge a break fee. Moneysmart warns that break fees “may be very high”, particularly if rates have fallen since you fixed.
• Some short-term loans charge all or part of the agreed cost even if you repay early. Ask the lender exactly how an early payout is calculated.
• Variable loans more often allow extra repayments without a fee.
• Refinancing has its own costs. business.gov.au suggests checking whether interest savings outweigh the exit fees and the new loan’s set-up costs.

Step by step

1. Map your cash flow. List when money comes in and goes out across a normal month and your quietest month.
2. Choose a frequency you can meet. Pick one that lines up with when you are paid.
3. Model the loan. Use the repayment calculator to compare frequencies and terms.
4. Ask for the total amount repayable. Include all fees, in dollars.
5. Check the structure. Confirm whether there is an interest-only period, capitalised interest or a balloon, and how you will repay it.
6. Read the early repayment terms. Ask how an early payout is calculated before you sign.
7. Talk to your accountant about which structure suits your cash flow and how the interest is treated for tax.

Important things to know

• Lower repayments can mean a higher total cost. Interest-only periods, balloons and longer terms all reduce each repayment but keep the balance higher for longer.
• Frequency affects your bank balance, not just the cost. A dishonoured repayment can add fees and hurt your credit history.
• Plan for the end of the loan. Balloons and capitalised interest create a large final payment that needs a clear source.
• If you are struggling to make repayments, talk to your lender early. business.gov.au suggests talking to creditors about hardship arrangements or payment plans. The free Small Business Debt Helpline is on 1800 413 828.

Compare business loans and cashflow loans when you are ready.