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# Small business loans sit 3 points above the cash rate
- URL: https://www.bushletter.com/small-business-loans-sit-3-points-above-the-cash-rate/
- Published: 2026-08-06T08:19:00.000Z
- Updated: 2026-08-06T08:19:47.000Z
- Description: Small business borrowers pay about three percentage points more than the headline cash rate, and most of that gap has nothing to do with what the Reserve Bank decides on the day.
- Author: Editor
- Tags: Finance, Australia, Reserve Bank of Australia, #By Claire Bennett

![Claire Bennett](https://res.cloudinary.com/dz77sb7j1/image/upload/v1774262574/bushletter/authors/claire-bennett.png)

By **Claire Bennett** · 2026-08-04

TLDR

Australian small businesses paid an average of 7.39 per cent on outstanding loans in May 2026, more than three percentage points above the cash rate. The Reserve Bank held rates steady at 4.35 per cent in June 2026, but that gap is largely driven by bank funding costs, risk margins and loan type, not the headline rate alone.

KEY TAKEAWAYS

01Small businesses paid an average of 7.39 per cent on outstanding loans in May 2026, against a cash rate of 4.35 per cent.

02The spread between the cash rate and average small business loan rates reached 3.04 percentage points in May 2026.

03Major bank funding costs ran at 3.76 per cent in March 2026, below the then cash rate of 4.10 per cent.

04New small business loan rates averaged 7.26 per cent in May 2026, 13 basis points below the outstanding stock rate.

05Variable business loan rates track short-term BBSW, not the cash rate directly, slowing how fast cuts flow through.

## The number behind the headline

When the Reserve Bank's Monetary Policy Board met on 17 June 2026 and left the cash rate at 4.35 per cent, the announcement barely moved the needle for most small business owners.[\[1\]](https://www.rba.gov.au/speeches/2026/mc-gov-2026-06-16.html?ref=bushletter.com) The rate they actually pay on borrowed money had already settled somewhere quite different. In May 2026, the average outstanding interest rate on small business loans was 7.39 per cent, a spread of 3.04 percentage points above the cash rate.[\[2\]](https://www.rba.gov.au/statistics/interest-rates/?ref=bushletter.com)

That gap is not an accident or a rip-off. It is the product of several layers of cost sitting between the Reserve Bank's overnight rate and the moment a borrower draws down a term loan or hits the limit on an overdraft. Understanding each layer is the only way to know whether your own rate is reasonable, or whether it is worth picking up the phone to your lender.

## Why banks do not pass the cash rate through directly

Governor Michele Bullock confirmed the hold at a press conference on 16 June 2026\. "Good afternoon. So as you know today the Board decided to leave the cash rate target unchanged at 4.35 per cent," she said.[\[1\]](https://www.rba.gov.au/speeches/2026/mc-gov-2026-06-16.html?ref=bushletter.com) What that statement does not capture is how little of that rate a small business borrower actually sees reflected in their facility.

The Reserve Bank's own research makes the mechanism plain. "Variable-rate business loans are typically priced with reference to short-term interest rates, such as the cash rate or BBSW," the Bank's May 2026 bulletin said.[\[3\]](https://www.rba.gov.au/publications/bulletin/2026/may/developments-in-banks-funding-costs-and-lending-rates.html?ref=bushletter.com) BBSW, the Bank Bill Swap Rate, is the rate at which banks lend to each other over short terms. BBSW tracks the cash rate but is not identical to it, and that difference alone means business loan rates lag any Board decision by weeks or months.

Media conference: Monetary Policy Decision, 16 June 2026

Beyond BBSW, banks layer in their own funding costs. As at March 2026, major banks' overall funding costs were estimated at 3.76 per cent, below the cash rate at the time but still a substantial floor beneath which lending margins must sit.[\[3\]](https://www.rba.gov.au/publications/bulletin/2026/may/developments-in-banks-funding-costs-and-lending-rates.html?ref=bushletter.com) Hedging contracts, which banks use to manage interest rate exposure across their balance sheets, contributed a 15 basis point decline in those funding costs since January 2025, compressing but not eliminating the gap between what banks pay and what borrowers receive.[\[3\]](https://www.rba.gov.au/publications/bulletin/2026/may/developments-in-banks-funding-costs-and-lending-rates.html?ref=bushletter.com)

## New loans versus the existing stock

There is one detail in the RBA's interest rate data that gets overlooked in every rate-decision news cycle. New small business loans were written at an average of 7.26 per cent in May 2026, thirteen basis points below the 7.39 per cent average on the outstanding stock of existing loans.[\[2\]](https://www.rba.gov.au/statistics/interest-rates/?ref=bushletter.com) That gap exists because existing facilities carry legacy margins negotiated years ago under different conditions, and because many older loans have not been refinanced even as competitive pricing has tightened.

For a business sitting on a loan written two or three years ago at a higher margin, that 13-basis-point difference is worth doing the arithmetic on. A 100-basis-point difference on a $500,000 term loan is $5,000 a year in additional interest. The Board's decision to hold or cut by 25 basis points is, in direct dollar terms, a fraction of what refinancing into current market pricing could achieve.

## How rate cuts actually reach business borrowers

The pass-through story for business loans is structurally slower than for residential mortgages. Variable home loans reprice almost immediately when the cash rate moves because they are directly tied to it. Business loans, priced off BBSW and negotiated facility by facility, move differently. New variable business loan rates declined through 2025 in line with movements in the cash rate and the three-month BBSW rate, then rose again in early 2026 as conditions changed.[\[3\]](https://www.rba.gov.au/publications/bulletin/2026/may/developments-in-banks-funding-costs-and-lending-rates.html?ref=bushletter.com) That pattern, following the direction of rate moves but with a lag and some dampening, is normal behaviour, not a deviation from it.

Waiting for the Board to deliver cuts and watching for the benefit to flow through is a slow strategy. Major bank funding costs running at 3.76 per cent in March 2026 were already materially below the cash rate, partly because hedging costs had fallen 15 basis points since January 2025.[\[3\]](https://www.rba.gov.au/publications/bulletin/2026/may/developments-in-banks-funding-costs-and-lending-rates.html?ref=bushletter.com) Banks have been capturing some of that compression as margin rather than passing it to borrowers in full, and that is worth knowing when you sit down across the table from a relationship manager.

## What moves your rate more than the RBA

The cash rate sets the floor of the system. Everything above it, the risk margin, the facility fee, the rate applicable to your specific business, is negotiable or at least variable in ways that dwarf a 25-basis-point Board decision. Four factors carry the most weight in practice.

Security is the largest single lever. A term loan backed by residential or commercial property attracts a lower risk margin than an unsecured overdraft because the bank's exposure in a default scenario is different. The type of facility matters too: overdrafts typically carry higher rates than term loans because the undrawn portion creates unpredictable funding demands for the lender. Loan size affects pricing because fixed assessment costs represent a larger proportion of the return on a small loan, and because larger exposures tend to attract more competitive pricing from lenders keen to win the business.

Credit assessment is the fourth factor, and the one most within a borrower's control. A clean set of financial statements, up-to-date tax lodgements, a demonstrated serviceability buffer and a clear explanation of what the funds are for all reduce the perceived risk the bank is pricing. That reduction flows directly into margin. A business that presents well on paper can negotiate meaningfully; one that arrives with incomplete records is at the mercy of whatever the bank's standard pricing happens to be.

## Three checks to run on your loan right now

Given that the average new small business loan rate in May 2026 was 7.26 per cent and the average outstanding rate was 7.39 per cent, there is a straightforward benchmark available.[\[2\]](https://www.rba.gov.au/statistics/interest-rates/?ref=bushletter.com) If your facility is materially above 7.39 per cent and was written more than eighteen months ago, you have a reasonable basis for a conversation with your lender or a competing institution.

First, pull your current loan agreement and identify the margin, the component above BBSW or the cash rate, explicitly said in the facility terms. Second, ask your lender for a current rate review in writing, referencing the RBA's published average rates for small business loans. Third, get one competing quote before the review meeting. You do not need to switch; you need the number. A written competing offer changes the dynamic of any renegotiation.

The Reserve Bank held at 4.35 per cent in June 2026, and the next move, whenever it comes, will be a quarter of a percentage point at most.[\[4\]](https://www.rba.gov.au/statistics/cash-rate/?source=post%5Fpage---------------------------) On a $500,000 loan, that is worth perhaps $1,250 a year. A well-prepared renegotiation of your margin, or a refinance into current market pricing, is worth considerably more.

This article contains analysis and commentary on market conditions. It does not constitute financial, investment, or professional advice. Past performance is not indicative of future results. Always consult a qualified adviser before making financial decisions.

SOURCES & CITATIONS

1. [RBA Governor Press Conference, 16 June 2026](https://www.rba.gov.au/speeches/2026/mc-gov-2026-06-16.html?ref=bushletter.com)
2. [RBA Statistical Table F7, Indicator Lending Rates](https://www.rba.gov.au/statistics/interest-rates/?ref=bushletter.com)
3. [RBA Bulletin, Developments in Banks' Funding Costs and Lending Rates, May 2026](https://www.rba.gov.au/publications/bulletin/2026/may/developments-in-banks-funding-costs-and-lending-rates.html?ref=bushletter.com)
4. [RBA Cash Rate Target](https://www.rba.gov.au/statistics/cash-rate/?source=post%5Fpage---------------------------)
5. [ABS: Lending Indicators, latest release](https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release?ref=bushletter.com)
6. [APRA: Monthly authorised deposit-taking institution statistics](https://www.apra.gov.au/monthly-authorised-deposit-taking-institution-statistics?ref=bushletter.com)

FREQUENTLY ASKED QUESTIONS

Why is my small business loan rate so much higher than the cash rate?

The cash rate is an overnight interbank rate, not a direct lending rate. Banks add their own funding costs, a risk margin based on your business and security, and a facility charge. Together those layers typically add three or more percentage points above the cash rate.

Does a Reserve Bank rate cut automatically lower my business loan rate?

Not automatically and not immediately. Variable business loans are priced off the Bank Bill Swap Rate (BBSW), which tracks but does not mirror the cash rate. Pass-through is slower and often partial for business loans compared with residential mortgages.

What was the average small business loan rate in May 2026?

The average outstanding rate was 7.39 per cent, according to RBA Statistical Table F7\. New loans written in the same month averaged 7.26 per cent, thirteen basis points lower.

What can I do to get a lower rate on my business loan?

Offering higher-quality security, presenting clean and complete financial records, choosing a term loan over an overdraft where possible, and obtaining a competing quote before renegotiating with your current lender all have a greater impact on your rate than waiting for a Board decision.

![Claire Bennett](https://res.cloudinary.com/dz77sb7j1/image/upload/v1774262574/bushletter/authors/claire-bennett.png)

[Claire Bennett](https://bushletter.com/author/claire-bennett/?ref=bushletter.com)

Claire Bennett writes about work and workplace culture. She is interested in the gap between how organisations describe themselves and what it feels like to work inside them.