When people compare commercial loans, they almost always start with the interest rate. It is the obvious number, and it is the one every lender leads with. But in commercial lending, the way the loan is structured often matters more to your business than a small difference in rate. The wrong structure can strangle your cash flow or leave you scrambling to refinance at the worst possible moment. The right one gives you room to run your business.
Commercial finance is one of the most under-served corners of Australian lending. Only around 40 to 45 per cent of commercial deals go through a broker, against roughly 80 per cent of home loans, which means most business owners walk into a single bank and take whatever structure that bank offers. This guide explains the main structural choices, so you understand the levers before you sign.
This article is general information only and does not take your personal circumstances into account. You should get advice tailored to your situation before acting.
Interest only versus principal and interest
This is the choice most people have heard of, and it is the one that most directly affects your monthly cash flow.
Principal and interest
Every repayment covers the interest plus a slice of the loan balance. Your debt reduces from day one, you build equity in the property steadily, and by the end of the term the loan is paid off. Repayments are higher than interest only, but you are genuinely getting ahead with each one.
Interest only
For a set period, commonly one to five years on a commercial loan, you pay only the interest. The balance does not move. Repayments are lower, which frees up cash, but you are not reducing the debt during that window.
Interest only tends to suit a business that needs to preserve cash for a reason: funding a fit-out, managing a seasonal cash cycle, or getting through the early phase of occupying a new premises. It is also common among investors, because interest on an investment loan is generally tax-deductible while principal repayments are not, so an interest-only structure can maximise the deductible portion. That is a decision to make with your accountant, not off the back of a blog.
The trade-offs are real. Interest-only rates usually sit a little higher than principal and interest, you pay more total interest over the life of the loan because the balance is not shrinking, and when the interest-only period ends the repayment can jump sharply as the loan switches to principal and interest over a now-shorter remaining term. That reversion is predictable, so it should be planned for well in advance rather than met with surprise.
The commercial term trap: balloon payments
Here is the structural feature that catches business owners out most often, because it does not exist on a standard home loan.
A home loan term and its amortisation usually match: a 30-year loan is paid off over 30 years. Commercial loans frequently separate the two. A bank might offer a loan with a term of only one to five years, while the repayments are calculated as though the loan runs over 20 or 25 years. That keeps the repayments manageable, but it means that at the end of the short term, a large balance, the balloon, is still outstanding and falls due.
At that point the loan does one of two things. It reverts to principal and interest, lifting the repayment, or the balloon must be refinanced or repaid in full. Neither is a surprise to the lender, and it should not be a surprise to you. The borrowers who manage this well move early, refinancing while a fresh valuation still supports the loan, rather than waiting until the final weeks when their options narrow. Knowing your term and your amortisation are different numbers, and diarising the balloon date the day you settle, is one of the simplest ways to protect your position.
Fixed, variable, or split
Separate from how you repay is the question of how your rate behaves.
Variable
The rate moves with the lender’s base rate, which tracks the RBA cash rate and funding costs. Variable suits a borrower who wants flexibility, the ability to make extra repayments, or to refinance without break costs. The cost is exposure to rate rises.
Fixed
The rate is locked for a set period, giving you certainty over repayments, which makes budgeting easier for a business. The cost is reduced flexibility: extra repayments may be limited, and breaking a fixed loan early can attract significant break costs.
Split
Many commercial borrowers fix part of the loan and leave part variable. The fixed portion gives repayment certainty on the core debt, while the variable portion preserves flexibility for extra repayments or future restructuring. For a business balancing stability against the need to adapt, a split structure is often the sensible middle ground.
The number lenders really care about: DSCR
On the residential side, a lender focuses on your personal income. On the commercial side, the central measure is the debt service coverage ratio, or DSCR. It compares the net income the property or business produces against the loan repayments.
The maths is simple. If a property produces $180,000 a year in net income and the loan requires $140,000 a year in repayments, the DSCR is $180,000 divided by $140,000, which is 1.29. Lenders want a comfortable margin above 1.0, and they usually test it under stressed assumptions, applying a higher assessment rate and conservative expenses, to make sure the loan does not become fragile if conditions tighten.
Understanding DSCR is useful because it shows you which levers actually move a commercial approval. If your ratio is tight, you can improve it by increasing the deposit to reduce the loan, lengthening the amortisation to lower the annual repayment, or using an interest-only period to ease near-term cash flow. Each of those is a structural choice, and each changes whether the deal fits the lender’s test.
Where commercial pricing sits in 2026
For context, as at mid-2026, indicative owner-occupier commercial rates start from around 6 per cent per annum for strong files on major-bank balance sheets. Investment-grade commercial typically sits in the mid six to mid seven per cent range, with investor, low-doc and specialised-property deals priced higher again, and private or specialist lending higher still to reflect the speed and flexibility it offers. Commercial rates run above home-loan pricing because commercial property carries more risk for a lender: higher vacancy, less predictable income and a narrower resale market.
The takeaway is not the specific number, which moves, but the principle: at these levels, structure is where the real savings and the real risks live. A slightly higher rate on a structure that fits your business will almost always beat a slightly lower rate on one that does not.
So what suits your business?
There is no single right answer, but some useful rules of thumb:
- Owner-occupier planning to hold long term. Principal and interest usually makes sense. You are building equity in an asset you intend to keep, and paying the debt down is the point.
- Business needing cash flow headroom now. An interest-only period can bridge a fit-out, an expansion or a seasonal cycle, provided you have a clear plan for the reversion.
- Investor focused on tax efficiency. Interest only is common, but this is a conversation for your accountant, since the right answer depends on your broader tax position.
- Anyone wanting budgeting certainty. Fixing all or part of the loan removes the guesswork, at the cost of some flexibility.
- Anyone with a short commercial term. Whatever else you choose, know your balloon date and plan the refinance early.
Frequently asked questions
How long is an interest-only period on a commercial loan? Commonly one to five years, though it varies by lender and by whether the property is owner-occupied or an investment. When it ends, the loan reverts to principal and interest over the remaining term.
What is a balloon payment? It is the balance still outstanding at the end of a short commercial term, where repayments were calculated over a longer period. It must be refinanced or repaid when the term expires, so it should be planned for from settlement.
Is interest only more expensive overall? Usually, yes. The rate is often slightly higher, and because the balance does not reduce during the interest-only period, you pay more total interest over the life of the loan.
What is a good DSCR? Lenders want to see comfortably above 1.0, tested under stressed assumptions. The exact threshold varies by lender and property type, which is one reason the same deal can pass with one lender and fail with another.
Can I change my loan structure later? Often, yes. Switching from interest only to principal and interest is usually possible, and refinancing lets you reset the structure entirely, though a lender may reassess serviceability at that point.
Where to from here
Rate matters, but structure is what determines whether a commercial loan works with your business or against it. Repayment type, rate type, term, amortisation and how they interact with the lender’s DSCR test are the levers that decide both what you can borrow and how comfortable the loan feels once it is in place.
At UniFi Capital, structuring commercial deals is core to what we do, and my background in commercial credit means I can talk you through the trade-offs in the context of your actual business rather than in the abstract. If you are looking at a commercial purchase or refinance, it is worth getting the structure right before you settle on a lender.
To work through the right structure for your commercial loan, get in touch with UniFi Capital.
