Expensive business borrowing

From Challenger Chief Economist Dr Jonathan Kearns

The increase in mortgage interest rates from the higher RBA cash rate gets a lot of attention. But business borrowing rates have also increased with the cash rate, reducing the spare cash flow of business. Business loan rates vary based on the size of the business, whether the loan is secured, whether it is fixed or variable, and the individual characteristics of the business.

Two benchmark small business interest rates are still a bit below their peaks in the mid-1990s and in 2008, two episodes when inflation increased, but by less than today.

Small businesses pay higher interest rates than large business as they are considered to be more risky. The cash rate has increased by 4.25% since its pandemic low of 0.1%. Interest rates available on new variable rate large business loans have increased by a similar amount, but rates on small business loans have increased by a bit under 4%.

The change in all outstanding business loans tell a similar story. Large business loans have increased by more than small business loans, but are still lower than those faced by small businesses. The increase in rates will be putting some businesses under pressure. There has been some increase in business bankruptcies, but most likely there is more to come.