How to get the best interest rate on your business and commercial loans

The best way to get a great rate from your bank is to understand how interest rates are calculated

How to negotiate the best interest rate from your bank

In a previous article we went through how banks calculate the interest rate they charge on the business and commercial loans to each client. For a quick review of this, click here.


Business Loan Interest rate = Wholesale rate + cost of funds + capital cost + operating costs and profit.

The wholesale rate and the cost of funds are rates we can’t negotiate.  These are in effect the gross cost of the interest rate that the bank passes on to you as the final borrower. That said, it is important to know what the actual wholesale and cost of funds rates are so you know what rate above this you are paying.

Capital Requirements

The capital requirement is the amount of capital a bank has to hold as required by APRA. There are a number of factors that go into what drives this cost but to us the borrower, there are two things that we can control to help us get the best rate.

Your risk profile

Client’s deemed riskier (based on security level and your business performance) have a higher capital requirement and hence their rate is higher. You can control how the bank sees you from a risk perspective by a number means:

  • Account conduct: many banks rank, especially in the SME (Small to Medium Enterprises) space give a risk grading to clients based on good account conduct. Healthy movement of funds, never going over drawn on your account etc etc can improve your risk grade

  • Business performance: clearly, we all want to have our business succeed, but no matter the performance of the business, it is important that we present the business to the bank in the best (and most honest light).  If you had a brilliant few years, then you will be graded well but if the year wasn’t so crash hot, make sure you have good explanations and how you will address this.  Don’t assume that the numbers will speak for themselves, you need to explain what’s in between the lines.

  • Intangibles: these days, banks understand that it’s not just what is on the P&L that matters (don’t kid yourself, P&L is IMPORTANT!) but you can enhance your rating with other things as well.  Management depth and business acumen, business competitive advantages in the market or industry, and business longevity are just a few other things that help your risk grading.

  • Security: property is always the best form of security for the bank and hence will dramatically affect the bank’s capital costs. That said, there are other forms of security like intangibles of the balance sheet as well other assets such as plant and equipment and machinery.

READ: How to find and fund your business premises >

Lending product

Lending products that are deemed riskier face much higher capital costs. Products like overdrafts, factoring and debtor finance are deemed risker and hence face higher costs.  Lending solutions such as term debt or Trade Finance are considered much lower risk and face lower capital costs which should be passed on to you the borrower.  You need to make sure you are choosing the right solution for the right purpose to get the lowest capital cost. For example, is an overdraft the best way for you to fund the next car purchase?

Operating Costs and Profits

This part is where your negotiation skills come in.  This part is where the bank pays for its operating costs and more importantly makes its money.  Like any business transaction, there are plenty of factors that drives the profit ideals of each transaction. How you negotiate the best deal is a combination of carrot and stick.  Don’t just think it’s about trying to squeeze the bank to as low as possible, sometimes you’ll get the rate even lower if you play “hard to get” and make them chase you. But to do that best, you need to make yourself as attractive as possible:

  • The bank can make their money somewhere else.  If you have other bank facilities like transactional banking, credit card or leasing then you are more valuable to the bank

  • Demonstrate your network. If the banker feels that you will be able to introduce them to other new clients, then they definitely want to buy your business

  • The right client.  Different banks have different strategies of growth and to match their growth strategy chase certain industries harder than others.  Learn which bank want to deal with your industry and you are one step ahead.

  • Get referred. Banks will sometimes give clients of referral sources a better deal to encourage the referrer to continue to send them more business.

  • It’s a people thing.  Commercial and business finance is very much a relationship game with a decent level of individual discretion.  Do you ever find yourself giving the clients you enjoy the company of or like a bit more, a better deal? Well, in banking it’s no different.

Last tip, these negotiations are not a onetime thing, you need to stay on top of this as much as you stay on top of all of your other supplier prices.

All too complicated?


Running a business is hard enough, if you want some advice on you can take advantage of this type of funding, feel free to contact us.

How are business and commercial loan interest rates calculated?
5 Ways to Get a Great Deal from the Bank

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January 6, 2018

Know how bank's interest rates are determined and how you can negotiate the best interest rate on your commercial or business loan.

December 25, 2017

How you negotiate the best deal is a combination of carrot and stick.  Don’t just think it’s about trying to squeeze the bank to as low as possible an interest rate, sometimes you’ll get the rate even lower if you play “hard to get” and make them chase you.

December 23, 2017

When it comes to your bank loan interest rates, its completely fair enough if you are sceptical.  I’m sure your banker has assured you that you have the best interest rate you could possibly get but how did they come to this rate?  Is it really the best interest rate y...

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