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# Small businesses pay 6% to borrow, big companies pay 4%
- URL: https://www.bushletter.com/small-businesses-pay-6-percent-to-borrow-big-companies-pay-4/
- Published: 2026-08-16T23:00:00.000Z
- Updated: 2026-08-16T23:00:00.000Z
- Description: The average interest rate on an outstanding variable-rate smaller loan to a small or medium business sits around 6.0 per cent, against roughly 5.0 per cent for larger business loans and 4.0 per cent for loans to large companies. Most of that gap is about security, not size.
- Author: Editor
- Tags: Finance, Australia, Business, Small business

![Elias Thorne](https://res.cloudinary.com/dz77sb7j1/image/upload/v1774262579/bushletter/authors/elias-thorne.png)

By **Elias Thorne** · 2026-08-04

TLDR

Australian small businesses pay about two percentage points more on variable-rate loans than large corporations, Reserve Bank data shows. Unsecured non-bank loans can reach 35 per cent per annum, several times the rate on a secured bank term loan. The dollar consequences on any realistic loan size are substantial.

KEY TAKEAWAYS

01Smaller SME variable loans averaged around 6.0 per cent in June 2026, versus 4.0 per cent for large-business loans.

02Unsecured non-bank lenders charge 12 to 35 per cent per annum, far above secured bank term loan rates.

03Residential-property-secured SME loans are on average four-and-a-half times larger than non-residentially secured loans.

04Unsecured credit accounts for less than 5 per cent of total SME borrowing, reflecting how rarely businesses skip collateral.

05New SME variable-rate loan margins narrowed to about 2.25 points above the cash rate as lender competition increased.

## Where small business sits on the rate ladder

The average interest rate on an outstanding variable-rate smaller loan to a small or medium business sits around 6.0 per cent, against around 5.0 per cent for larger SME loans and around 4.0 per cent for loans to large businesses.[\[1\]](https://www.rba.gov.au/chart-pack/pdf/chart-pack.pdf?v=2025-05-08-19-14-17&ref=bushletter.com) That puts the smallest business borrowers a full two percentage points above what a large corporation pays on the same type of facility. Major banks' standard variable rates for owner-occupier housing loans were around 6.5 per cent at the same date.[\[1\]](https://www.rba.gov.au/chart-pack/pdf/chart-pack.pdf?v=2025-05-08-19-14-17&ref=bushletter.com)

The rate ladder runs roughly like this: large-business credit at 4.0 per cent, larger SME loans at 5.0 per cent, smaller SME loans at 6.0 per cent, and home loans a further half a point above that. Small businesses sit in the middle of that stack, paying more than corporations but less than households on a secured basis. The gap between the smallest SMEs and the largest companies is the one that carries the most weight in day-to-day borrowing decisions.

## How much of the premium is about size versus security

Many small business owners assume a loan secured by a mortgage over their home should attract something close to a home loan rate. David Cohen, Chief Risk Officer at Commonwealth Bank of Australia, pushed back on that directly. "There is a view generally because a business loan is secured by a mortgage over someone's home that therefore interest rates should be the same as the home loan, that's just not true," Cohen said.[\[4\]](https://www.sbs.com.au/news/article/cba-defends-small-business-loan-rates/87v940n3s?ref=bushletter.com)

Business lending carries higher administrative costs per dollar lent, greater variability in cashflow and, historically, higher default rates than owner-occupier mortgages. The collateral reduces the loss given default; it does not eliminate the probability of default, which is what drives the rate spread. Lenders price both dimensions separately, and SMEs score worse on the second measure regardless of what property they pledge.

## What lenders are actually pricing in an unsecured loan

Move away from bank lending entirely and the rate premium becomes severe. Non-bank lenders typically charge between 12 per cent and 35 per cent per annum for unsecured business lending in Australia.[\[3\]](https://www.avoir.com.au/blog/business-loan-interest-rates-australia?ref=bushletter.com) That upper boundary is roughly eight times the rate a large corporation pays on its variable-rate debt. James Baker, Founder of Avoir, said non-bank lenders "charge higher rates, typically 12-35 per cent p.a. for unsecured business lending, but offer same-day approval, require only bank statements, and have significantly higher approval rates for SMEs."[\[3\]](https://www.avoir.com.au/blog/business-loan-interest-rates-australia?ref=bushletter.com)

The premium breaks into three parts. First, pure default risk: with no collateral, the lender's recovery on a failed loan approaches zero. Second, operational cost: same-day approvals using bank-statement data compress the underwriting process but require expensive technology and absorb higher per-loan losses. Third, selection bias: borrowers who cannot or will not pledge property are, on average, riskier than those who can. The rate range of 12 to 35 per cent reflects enormous variability within that pool, not lender arbitrariness.

## The dollar difference: a worked example

The basis-point gap becomes concrete on a realistic loan. Take a $250,000 three-year term loan. At 6.0 per cent, the annual interest bill is approximately $15,000, declining over time as principal is repaid. At 12 per cent, the floor of the unsecured non-bank range, that annual interest bill roughly doubles to around $30,000\. At 35 per cent, interest over the first year alone exceeds $87,000, a figure that would absorb the operating profit of most small businesses seeking that quantum.

Even the more modest gap between large-business and small-business secured bank lending carries weight. On a $500,000 facility, the 200-basis-point spread between a 4.0 per cent large-company rate and a 6.0 per cent SME rate represents $10,000 per year in additional interest cost. Compounded over a five-year term, the cumulative premium approaches $50,000 before any adjustment for principal repayment.

## Competition has narrowed spreads on new lending

There is some relief in the flow data, even if it has not yet fully flowed through to outstanding balances. As of October 2025, new variable-rate loan margins were about 2.25 points above the cash rate for smaller SME loans and about 2 points for larger ones.[\[2\]](https://www.rba.gov.au/publications/bulletin/2025/oct/pdf/small-business-economic-and-financial-conditions.pdf?ref=bushletter.com) The Reserve Bank said that variable interest rates on SME loans had declined by a little more than the cash rate, consistent with increased lender competition.[\[2\]](https://www.rba.gov.au/publications/bulletin/2025/oct/pdf/small-business-economic-and-financial-conditions.pdf?ref=bushletter.com)

The RBA raised the cash rate target to 4.35 per cent in May 2026.[\[5\]](https://www.rba.gov.au/media-releases/2026/mr-26-12.html?ref=bushletter.com) At that setting, a 225-basis-point spread on new smaller SME loans implies an all-in variable rate of around 6.6 per cent for borrowers refinancing or drawing new facilities. The absolute rate is higher than a year ago; the spread above the cash rate has narrowed. Whether that compression continues depends on whether the competition among lenders that drove the narrowing proves durable as credit conditions tighten.

## The collateral trade-off: what pledging property gets you

Reserve Bank data on loan size clarifies why residential property security dominates SME borrowing. New loans secured with residential property are on average four-and-a-half times as large as non-residentially secured loans.[\[2\]](https://www.rba.gov.au/publications/bulletin/2025/oct/pdf/small-business-economic-and-financial-conditions.pdf?ref=bushletter.com) Lenders extend substantially larger facilities when a property title is on the table, so the borrower who pledges their home does not merely get a lower rate; they access a fundamentally different tier of lending in terms of size and tenor.

The share of SME credit that is unsecured has remained below 5 per cent over recent years.[\[2\]](https://www.rba.gov.au/publications/bulletin/2025/oct/pdf/small-business-economic-and-financial-conditions.pdf?ref=bushletter.com) That figure reflects revealed preferences clearly: the vast majority of SME borrowers, when they need meaningful capital, accept the collateral requirement rather than pay the unsecured premium. The sub-5 per cent who do not are either unable to pledge property, need capital faster than the secured process allows, or require amounts too small to justify the documentation burden of a bank facility.

Pledging residential property cuts the borrowing cost by somewhere between 6 and 29 percentage points depending on which comparison applies. It also puts the family home at risk if the business fails. That asymmetry is what makes the collateral decision one of the most consequential a small business owner makes, and the spread data from the Reserve Bank now prices it with some precision.

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 Chart Pack, June 2026](https://www.rba.gov.au/chart-pack/pdf/chart-pack.pdf?v=2025-05-08-19-14-17&ref=bushletter.com)
2. [RBA Bulletin: Small Business Economic and Financial Conditions, October 2025](https://www.rba.gov.au/publications/bulletin/2025/oct/pdf/small-business-economic-and-financial-conditions.pdf?ref=bushletter.com)
3. [Avoir: Business Loan Interest Rates Australia, May 2026](https://www.avoir.com.au/blog/business-loan-interest-rates-australia?ref=bushletter.com)
4. [CBA defends small business loan rates](https://www.sbs.com.au/news/article/cba-defends-small-business-loan-rates/87v940n3s?ref=bushletter.com)
5. [RBA Media Release: Cash Rate Decision, May 2026](https://www.rba.gov.au/media-releases/2026/mr-26-12.html?ref=bushletter.com)

FREQUENTLY ASKED QUESTIONS

Why do small businesses pay more on loans than large corporations?

Small businesses carry higher per-dollar administrative costs, greater cashflow variability and historically higher default rates than large corporations. Lenders price both the probability of default and the loss given default separately, so even when property is pledged as security the business risk premium remains.

What interest rate do small businesses pay on variable loans in Australia?

Reserve Bank data shows the average interest rate on outstanding variable-rate smaller loans to SMEs was around 6.0 per cent in June 2026, compared with 4.0 per cent for loans to large businesses.

How much do unsecured non-bank business loans cost in Australia?

Non-bank lenders typically charge between 12 per cent and 35 per cent per annum for unsecured business lending in Australia, according to Avoir. The range reflects differing default risk, approval speed and borrower creditworthiness.

Does pledging your home as security lower your business loan rate?

Yes materially. Secured bank rates run around 6.0 per cent for smaller SMEs versus 12 to 35 per cent for unsecured non-bank facilities. Residential-property-secured loans are on average four-and-a-half times larger in size, so the lower rate comes with significantly greater personal exposure.

![Elias Thorne](https://res.cloudinary.com/dz77sb7j1/image/upload/v1774262579/bushletter/authors/elias-thorne.png)

[Elias Thorne](https://bushletter.com/author/elias-thorne/?ref=bushletter.com)

Elias Thorne writes about interest rates, the bond market and the Reserve Bank. He is interested in what monetary policy actually does to household budgets, and in the long stretches of economic history that tend to repeat.