Key takeaways:
Fixed-rate business loans offer repayment certainty for an agreed period, but early repayment restrictions and break costs may apply.
Variable-rate business loans can offer greater flexibility, although interest rate changes may affect repayments and cash flow.
Balloon payments reduce regular repayments but generally increase total interest costs, leaving a lump sum payable at the end of the loan.
Business finance structures vary by purpose and asset type, with chattel mortgages, finance leases and hire purchase agreements offering different ownership and repayment arrangements.
Compare total borrowing costs, not just interest rates. Consider fees, repayment flexibility, cash flow and any final balloon payment before choosing a loan.
Choosing the right business loan structure can affect your repayments, cash flow and total borrowing costs. Whether you're a business owner, sole trader or tradie financing vehicles, equipment or working capital, understanding fixed and variable interest rates and balloon payments can help you compare business loans.
Below, we explain how each option works, its potential benefits and drawbacks, and what to consider when choosing a loan structure for your business.
Fixed vs. variable rates at a glance
Fixed-rate business loans offer more predictable repayments, while variable-rate loans may provide greater flexibility. Here's how they compare:
Feature | ||
|---|---|---|
Generally predictable during the fixed period | Repayments may change | |
Protected from rate increases during the fixed period | Rate may increase | |
Won't benefit from rate reductions during the fixed period | Rate may decrease | |
May be restricted or incur fees | Often more flexible | |
May be unavailable | May be available | |
Early repayment | Break costs may apply | Generally fewer restrictions, but fees may apply |
End of rate period | May revert to a variable rate | Usually remains variable |
Features, fees and restrictions vary by lender and loan product.
What is a fixed-rate business loan?
A fixed-rate business loan locks in your interest rate for a period, making repayments more predictable. This can help businesses manage cash flow and budget for expenses such as wages, rent and equipment.
However, you won't benefit if interest rates fall during the fixed period, and restrictions may apply to early or extra repayments.
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How long can you fix a business loan?
Fixed-rate periods and loan terms vary by lender and finance product.
Business term loans may offer fixed-rate periods of 1–5 years, while equipment and vehicle finance can offer fixed rates for loan terms of 1–7 years.
The following examples illustrate options advertised by selected Australian lenders.
Lender | Business finance product | Advertised fixed-rate period |
|---|---|---|
Fixed-rate periods of up to 5 years | ||
Fixed-rate terms of 1–5 years | ||
Fixed rates with loan terms of 1–7 years | ||
Typically 1–7 years, with repayments generally fixed for the term |
Note: These are lender-advertised examples, not industry averages. Fixed-rate periods, loan terms and eligibility requirements vary by lender and product.
What happens when the fixed period ends?
Some fixed-rate business loans revert to a variable rate when the fixed period ends, which can change your repayments.
Review your loan before expiry to understand the new rate and assess whether to refinance, negotiate or continue with your existing lender.
You might also be interested in: Expiring fixed rate? How to prepare for potentially higher mortgage repayments
Break costs and extra repayments
Some fixed-rate business loans charge break costs if you repay, refinance or change your loan before the fixed period ends. These costs vary by lender and loan agreement.
For example, if your business receives a large contract payment and you decide to repay your loan early, break costs could offset some of the interest savings.
Fixed loans may also limit extra repayments or restrict access to redraw facilities.
Before choosing a fixed rate, check:
Break costs: Fees for repaying or changing your loan early.
Extra repayment limits: How much additional debt you can repay without penalties.
Redraw restrictions: Whether you can access eligible extra repayments.
Understanding these conditions can help you assess whether a fixed-rate business loan suits your cash flow needs and repayment plans.
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What is a variable-rate business loan?
A variable-rate business loan has an interest rate that can rise or fall over the loan term, which can change your repayments. This can make cash-flow planning harder, particularly when rates increase.
Variable loans may offer greater flexibility for extra repayments or early loan repayment, although features, fees and restrictions vary by lender and product.
You might also be interested in: Your guide to variable rate home loans in Australia
What makes a variable rate change?
Lenders set their own variable rates based on factors including the Reserve Bank of Australia's (RBA) cash rate decisions, funding costs and commercial considerations.
However, lenders aren't required to pass on RBA rate changes in full or immediately. For example, a cash rate cut doesn't guarantee lower business loan repayments.
You can monitor interest rate movements through the RBA's cash rate target and monetary policy decisions.
Which business loans come with fixed or variable rates?
Interest rate options depend on the type of business finance and lender. Equipment and vehicle finance often have fixed rates, while business overdrafts and lines of credit typically have variable rates. Here's how common business finance options compare:
Business finance type | Typical rate structure | Balloon payment available? |
|---|---|---|
Unsecured business loan | Fixed or variable | Depends on lender |
Secured business loan | Fixed or variable | Depends on product |
Equipment or vehicle finance (chattel mortgage) | Often fixed | Commonly available |
Finance lease | Often fixed repayments | Residual value may apply |
Hire purchase | Often fixed | May be available |
Business overdraft or line of credit | Usually variable | Generally not offered |
Some asset finance options also differ in how ownership works:
Chattel mortgage: Your business owns the asset from the outset, with the lender holding security over it.
Finance lease: The financier owns the asset while your business pays to use it.
Hire purchase: Your business uses the asset through instalment payments, with ownership generally transferring once contractual obligations are met.
Rates, repayment structures and eligibility vary by lender and product.
If you're financing vehicles or machinery, explore Aussie's business finance options to compare available structures.
Can you split a business loan between fixed and variable rates?
Yes, some lenders allow eligible business loans to be split into fixed and variable portions.
This combines predictable repayments on the fixed portion with flexible repayments on the variable portion. However, available split ratios, features and eligibility criteria vary by lender and loan product.
What is a balloon payment?
A balloon payment is a lump sum payable at the end of a loan term.
Rather than repaying the full principal through regular instalments, you leave an agreed amount outstanding until the loan ends.
Common in business vehicle and equipment finance, particularly chattel mortgages, balloon payments reduce regular repayments compared with an equivalent loan without a balloon. However, you'll still need to pay the remaining balance at the end of the term.
How is the balloon amount set?
The balloon amount is agreed with the lender upfront, usually as a percentage of the amount financed. Lenders typically consider:
Loan term: The length of the finance agreement.
Asset type: Whether you're financing a vehicle, machinery or equipment.
Expected asset value: The asset's estimated value at the end of the term.
Maximum balloon amounts and eligibility criteria vary by lender and product.
Balloon payment vs residual value
Both involve an amount payable at the end of a finance agreement, but they apply to different structures:
Balloon payment: Common in chattel mortgages, where your business owns the asset and pays the remaining loan balance at the end.
Residual value: Common in finance leases, where the financier owns the asset. Depending on the agreement, your business may have the option to purchase it by paying the residual value.
The Australian Taxation Office (ATO) sets minimum residual value guidelines for certain car leases, with minimum percentages generally decreasing as the lease term increases.
Balloon payment example: How it affects repayments and total costs
A balloon payment can reduce monthly business loan repayments but generally increases total interest costs, as part of the loan balance remains outstanding. For example, your business borrows $80,000 to purchase equipment under these conditions:
Loan amount: $80,000
Loan term: 5 years
Fixed interest rate: 8.00% p.a. (illustrative only)
Repayments: Monthly
Balloon payment: 30% ($24,000)
Fees: Excluded
Here's how repayments compare:
Repayment measure | No balloon | 30% balloon |
|---|---|---|
$1,622 | $1,295 | |
Final balloon payment | $0 | $24,000 |
Total repaid | $97,327 | $101,729 |
Total interest | $17,327 | $21,729 |
Note: Figures are approximate and based on monthly compounding, using unrounded repayments for total calculations.
In this example, a 30% balloon reduces monthly repayments by around $327 but increases total interest by approximately $4,402 over five years. This highlights why businesses should compare total borrowing costs, not just monthly repayments.
What if the asset is worth less than the balloon?
If the equipment's resale value falls below the outstanding balloon payment, your business must cover the shortfall. For example:
Outstanding balloon: $24,000
Equipment resale value: $18,000
Shortfall: $6,000
Selling the equipment for $18,000 would leave your business with $6,000 to repay, excluding any selling costs. Before choosing a balloon payment, consider how you'll fund the final amount and whether your business can cover a potential shortfall.
Disclaimer: This example is illustrative only, based on an $80,000 loan over five years at 8.00% p.a. fixed, with monthly repayments and no fees or charges. The rate does not represent an available loan offer. Actual costs depend on lender terms and individual circumstances. Asset resale values are not guaranteed.
What are the pros and cons of a balloon payment?
Here's a summary of the potential benefits and drawbacks:
Potential pros | Potential cons |
|---|---|
Lower repayments: Reduces regular repayment amounts. | Higher interest costs: Generally increases total interest paid. |
More available cash: Frees up funds for operating expenses, such as wages and stock. | Final lump sum: Requires a substantial payment at the end of the loan. |
Asset replacement flexibility: May suit businesses planning regular vehicle or equipment upgrades. | Depreciation risk: The asset's resale value may fall below the balloon amount. |
Cash-flow management: May help businesses with seasonal or fluctuating income. | Refinancing uncertainty: Refinancing depends on lender approval and available terms. |
Before choosing one, compare the total cost and plan how you’ll fund the final payment.
What happens when the balloon payment is due?
When your balloon payment falls due at the end of the loan term, you'll need to repay the outstanding balance. Depending on your circumstances and loan agreement, you may have three options:
Pay the balloon: Use business savings or available cash flow to repay the balance and retain the asset.
Refinance the balloon: Apply for a new loan to cover the balance, subject to lender approval and the rates, fees and terms available at the time.
Sell or trade in the asset: Use the sale or trade-in proceeds to repay the balloon. You'll need to cover any shortfall.
Consider reviewing your options 6–12 months before the loan ends. Check your available funds, the asset's estimated resale value and potential refinancing requirements to prepare for the final payment.
Can you have a balloon payment with a fixed or variable rate?
Yes, balloon payments may be available with fixed or variable-rate business loans, depending on the lender and product. However, business vehicle and equipment finance with balloon payments commonly uses fixed rates for the full loan term.
The interest rate determines whether borrowing costs and regular repayments may change, while the balloon amount sets the final lump sum payable.
How to choose between fixed and variable rates and balloon payments
The right business loan structure depends on your cash flow, repayment capacity and plans. Consider both the ongoing repayments and total borrowing costs before deciding.
Questions to ask before choosing a business loan
Do you need predictable repayments? Consider whether a fixed rate would make budgeting easier.
Can you manage interest rate increases? Check whether your cash flow could absorb higher repayments without affecting essential expenses.
Will you repay the loan early? Assess whether extra repayment flexibility is important.
How long will you keep the asset? Consider when you might replace or upgrade financed vehicles or equipment.
Can you cover the balloon payment? Plan how you'll fund the final amount without relying solely on resale proceeds or refinancing.
Have you compared total borrowing costs? Account for interest, fees and potential break costs.
Could your cash flow change? Factor in seasonal income, rising expenses and unexpected costs.
An Aussie Broker can help you compare business finance options and understand which loan features may suit your borrowing needs and cash flow.
Tax and GST: What should business owners know?
Business loans and asset finance can have tax implications depending on how you use the funds and the finance structure. According to the Australian Taxation Office (ATO):
Interest deductions: Interest on loans used for eligible business purposes may be tax-deductible.
Depreciation: Eligible businesses may claim depreciation deductions on qualifying vehicles and equipment.
GST: Treatment differs between chattel mortgages, finance leases and hire purchase agreements.
Balloon payments: The final repayment generally reduces outstanding principal and isn't separately tax-deductible.
Eligible small businesses with aggregated annual turnover below $10 million that use simplified depreciation rules may also claim the instant asset write-off for qualifying assets costing less than $20,000 each. This threshold became permanent from 1 July 2026, subject to eligibility requirements.
Tax deductions and GST treatment depend on your business circumstances. Speak with your accountant or tax adviser before making finance decisions.
Disclaimer: This is general information only and does not constitute tax advice.
How can an Aussie Broker help with business finance?
Whether you're financing equipment, purchasing a business vehicle or funding business operations, understanding your finance options can help you make a more informed borrowing decision.
An Aussie Broker can help you compare business finance options from relevant panel lenders, explain fixed- and variable-rate features and restrictions, and assess balloon versus non-balloon repayment structures.
They can also help you review borrowing costs, fees and lender requirements, and guide you through the finance application process, subject to lender approval.
Book a free^ chat with an Aussie Broker to discuss your business finance needs and available options.
