The Truth About Business Lending Rates, And How to Improve Yours
“Improve your risk profile, and your interest rate will follow.”
As we head into the final stretch of the financial year, many business owners are focused on tax, compliance and closing out the books. What often gets overlooked is that this is also when banks reassess risk, and potentially your pricing.
If you have term debt, overdrafts or commercial property facilities, your interest rate is not random. It is largely driven by risk. And small differences in margin can translate into tens of thousands of dollars over time.
The good news is that you have more influence than you may think.
How banks determine your business interest rate
Banks price business lending using what’s called risk-based pricing. In simple terms, the stronger your business appears on paper and in practice, the lower the margin they are likely to apply above their base rate.
There are three core drivers behind your rate.
1. Security
The type and strength of security matters. Lending secured against commercial or residential property is typically priced sharper than unsecured lending. Lower loan-to-value ratios and strong equity buffers reduce the bank’s exposure and support better pricing outcomes.
2. Risk rating
Every business borrower is assigned an internal risk grade. This is no longer just a banker’s opinion. It is largely system-generated and based on financial performance, industry position, trends and account conduct.
Profitability, leverage, liquidity, industry risk and cashflow stability all feed into that rating. Banks look closely at debt-to-equity and interest cover ratios, essentially how much buffer your business has to service its debt.
A stronger risk grade generally results in a lower interest margin. A weaker one can quietly increase your cost of funds, even in a stable interest rate environment.
3. Competition and structure
If your lending has not been reviewed in several years, you may not be on your bank’s sharpest pricing. Testing the market ensures your margin reflects current conditions. Structure also plays a role. The right mix of term debt, revolving credit and appropriate security can influence overall pricing and flexibility.
What actually improves your risk rating
Many elements of your risk profile are within your control, particularly in the months leading into lender reviews.
Here are practical areas to focus on.
Increase equity where possible
Reducing debt, retaining profits or injecting capital strengthens your balance sheet. Even modest improvements in leverage can positively influence how a lender assesses your business.
Maintain healthy cash reserves
Consistent cash on hand and sensible working capital management demonstrate resilience. Liquidity remains a key risk indicator, particularly in uncertain economic conditions.
Focus on sustainable profitability
Revenue growth alone does not impress lenders. They are looking for stable, repeatable profit and strong debt servicing capacity. Improving margins and controlling costs can materially strengthen your position.
Show positive trends, not just one strong year
Banks assess patterns. Clean, up-to-date financial accounts showing steady improvement year on year support a stronger internal risk grade.
Keep account conduct clean
Avoid overdraft excesses, unpaid tax, late payments or covenant breaches. Behavioural signals increasingly feed directly into credit systems.
Present quality financial information
Timely, well-prepared financial statements matter. Ensuring short-term and long-term liabilities are correctly classified helps lenders accurately assess liquidity and leverage.
Provide forward-looking forecasts
Updated projections demonstrating sustainable earnings and debt servicing capacity can materially support your risk assessment, particularly for growing or evolving businesses.
A real example
We recently worked with a business that improved its risk rating by restructuring its presentation to the bank and supporting it with forward forecasts. The result was a reduction from 9% to 6% on an unsecured facility, saving more than $20,000 in interest in the first year alone.
The lending itself had not changed. The risk profile and presentation had.
Take control of your cost of finance
One of the most common mistakes business owners make is waiting until facilities are expiring before reviewing their position. By then, leverage is limited and options are narrower.
The businesses that consistently achieve sharper pricing treat lending as a strategic lever within their overall financial strategy, not an afterthought. They understand how banks assess risk, actively manage their financial profile and engage early in pricing discussions.
If you have not reviewed your lending in the last 12 months, there is a reasonable chance you are overpaying.
With the right preparation, this period can be more than an accounting exercise. It can be an opportunity to reset your lending, strengthen your risk profile and head into the new financial year with sharper pricing and better structured facilities.
At Vesta, we understand how banks assess risk and how to position your business clearly and accurately.
The above information is general in nature and does not constitute personalised financial advice. To discuss your own situation, speak with your financial adviser. At Vesta Finance & Advisory, we are happy to help.
Want to explore this further?
Get in touch with the team at Vesta to learn more about how you can get the most out of your business lending.
This article is for educational purposes only and is not personalised financial advice. Speak to an adviser about your own position.
Posted Feb 2026