Interest-Free Business Loans

Find out more about interest-free business loans, what they are and how they work in this handy guide.

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, updated on September 21st, 2023       

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If your business is in a position where a loan is necessary to help cover its costs, it’s important to understand the additional costs associated with different deals. While interest-free small business loans aren’t generally an option, there are ways to work around paying interest on your loan, which you can find out more about right here with Savvy.

How do I get an interest-free loan for my business?

Interest-free loans for SMEs in themselves are a very rare and limited product. In most cases, the only option available to owner-operators around the country is to receive a government grant. These aren’t loans but are instead an amount gifted by your state or federal government which come with no requirement to repay. Different grants are offered to different businesses around the country and new grants are introduced regularly, so it’s always worth keeping an eye on relevant websites to find out when something pops up which your business is eligible for.

Some of the government grant options available for small businesses include:

New Enterprise Incentive Scheme (NEIS)

The NEIS is a national program which helps small businesses in the process of starting out and growing with its New Business Assistance Program. Along with providing resources and training for small businesses, it can provide an allowance for up to 39 weeks and rental assistance for up to 26 weeks. This allowance is worth the equivalent of a JobSeeker Payment for a single with no children and 22 or over.

Accelerating Commercialisation

This federal government program offers matched funding for entrepreneurs, small and medium business operators and researchers, among others, to help commercialise their product or idea. Depending on what category your business fits into, you may be eligible for up to $500,000 or up to $1 million in matched funding.

CSIRO Kick-Start

Also available nationally, CSIRO’s Kick-Start Program offers matched funding to eligible businesses for certain research activities (to be conducted through CSIRO) such as researching an idea with commercial potential and the development and testing of novel products. Grants are available for $10,000 to $50,000.

How else can I access an interest-free loan as an SME?

If your business doesn’t qualify for a grant, or if they don’t suit your business’ needs, it can benefit from perhaps the most significant tax benefit of business loans: the interest portion of your repayments is tax-deductible. Although interest-free loans in themselves don’t really exist, claiming interest as a tax deduction makes almost every loan an interest-free one. Doing so can save your business thousands of dollars overall, ensuring you’ll only need to repay the principal portion of your loan alongside some fees.

Unsecured business loans are a highly useful source of funds for businesses, as they can be used for just about any purpose you wish. These are available without any collateral requirements and can be obtained for as little as $5,000 all the way up to $500,000, with loan terms on offer as short as three months up to a maximum of five years. Knowing that you can claim for all the interest charged on the loan at the end of the financial year can also provide you with a greater sense of certainty regarding the amount of money your business will have to work with.

In addition to the interest claimable on your business’ loan, you can also claim the interest paid on personal finance which is used to help grow or maintain your business. This can include any personal loans you may have taken out in place of a business loan.

Other top tips for reducing the interest on your business loan

Contribute some of your business’ available cashflow

One way to reduce the interest you’re liable to pay on your business loan is to reduce the overall loan size. If your business is in a position to do so, contributing some of its available funds towards the expenses which need covering will cut down on the amount of finance you need to take out in the first place. This may not be possible for all businesses, but it’s useful if you’re able to.

Opt for a secured business loan

Not all business loans are unsecured; secured business loans are another option which not only significantly increases your potential borrowing power, but also reduces the interest rate your business is eligible to receive. This is because lenders consider these loans to be less risky than unsecured financing, thus rewarding businesses who can put up collateral such as valuable equipment or equity in property.

Choose a shorter loan term

By that same token, selecting a shorter loan term from the outset will also set your business up to pay less interest overall. For instance, a $100,000 business loan at 5% p.a. repaid over a term of three years would garner interest worth $7,735 overall. However, shortening that term to two years instead will reduce the potential interest bill by over $2,500 to $5,131.

Make additional repayments on your loan

Paying down your business’ loan debt at a faster rate will cause the interest payable to reduce more steeply, thus potentially saving you hundreds of dollars overall. This is because interest is calculated based on the principal outstanding, so paying more than you’re required for each instalment (or making more frequent repayments) will cut down on the amount you’re required to pay.

Common questions about interest-free business loans

Should I get an interest-free government grant instead of a business loan?

Government grants and business loans can often serve very different purposes. In many cases, these grants are only available to a select number of businesses and part of their conditions may be that you’re required to use the funds for a certain purpose, neither of which is the case for business loans. Additionally, standard business loans can often provide greater potential borrowing amounts when compared to grants.

How long will it take for my interest-free government loan to be approved?

Some government grants can take weeks, if not months, to have applications fully processed and approved. These applications are also generally more labour-intensive, requiring a larger amount of paperwork from the outset. In contrast, you can have your business loan approved and funded in the space of just three hours in some cases, owing to the more flexible qualification criteria and lower number of documents required.

Should I keep a record of my business loan repayments to claim them?

Yes – you should always keep a thorough record of your business loan repayments if you plan to claim the interest portion as a tax deduction in your business’ return. Not having solid evidence of this can hamper your ability to claim them, as is the case with any expenses being claimed on a return. Always ensure you have copies of your payments stored away and accessible once the time comes for you to complete your business’ return.

Can I get an interest-free small business loan for my startup?

Yes – grants and government loans are available to startups in addition to established businesses. You can also find a range of specialist lenders operating online who can approve loans for new startup businesses which otherwise don’t meet the required six months’ worth of trading time, although you’ll have fewer options to choose from. These come with lower borrowing ranges and higher interest rates due to the increased risk taken on by the lender.

How can I work out the amount of interest I’ll end up paying on my loan?

You can use Savvy’s business loan repayment calculator to crunch the numbers on what different loan amounts, terms and rates will end up costing your business. Compare your options right here and calculate how much each of them may cost to help determine which is the best offer for your business.

Will I pay less interest on a business line of credit?

You may – while business lines of credit generally come with higher interest rates than regular business loans, one factor counting in their favour is that you’ll only need to pay interest on the amount you use. For instance, if you had a $200,000 line of credit and only used $75,000, you would only be charged interest based on the $75,000 used. As a result of this, you may find that you’d pay less interest with a line of credit, although this will differ for every business.

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