Interest rates aren’t just numbers on a loan agreement—they can shape your business’s future. Whether you’re starting up or expanding, the cost of borrowing affects everything from cash flow to profitability. But why do these rates fluctuate, and how do they impact affordability, repayment strategies, and financial planning?
This guide unpacks everything you need to know about business loan interest rates in South Africa—from what determines them to how they shape business growth.
What Determines Business Loan Interest Rates in South Africa?
Before diving into the impact of interest rates, let’s first explore what drives them.
The Role of the South African Reserve Bank (SARB)
The South African Reserve Bank (SARB) plays a key role in setting interest rates. The repo rate—the rate at which banks borrow from SARB—directly influences lending rates across the country.
When inflation rises, or the economy overheats, SARB may increase the repo rate to cool things down. On the flip side, if economic growth slows, lowering the repo rate encourages borrowing and investment.
Since banks set their prime lending rates based on the repo rate, any change trickles down to business loan interest rates. If SARB raises the repo rate, borrowing gets more expensive. If it drops, loans become cheaper.
Risk Factors That Influence Interest Rates
Beyond central bank policies, lenders assess your business’s financial strength before deciding on an interest rate. These are the key factors they consider:
- Credit Score: A strong business credit score means better rates. Poor credit? Expect higher costs.
- Business Financial Health: Lenders check cash flow, debt levels, and profitability before offering a loan.
- Loan Type: Secured loans (backed by assets) usually have lower rates than unsecured loans (higher risk for lenders).
- Loan Term Length: Short-term loans often have higher interest rates, while longer terms spread costs out.
Lenders want assurance (that’s one of the three allowed uses!) that you’ll repay the loan, and they price that risk into your interest rate.
How High Interest Rates Impact Business Loans
Interest rates affect more than just business loan costs. They also reshape business decisions, influence expansion plans, and dictate how accessible funding is.
Increased Loan Repayment Costs
Higher interest rates mean higher monthly repayments. A 10% loan rate might be manageable, but push that to 15% or more, and suddenly, your business is bleeding cash.
For example, a R500,000 loan at 10% over five years would cost around R10,600 per month. At 15% interest, that jumps to R11,900—a big difference for businesses with tight margins.
Reduced Access to Affordable Financing
When interest rates rise, lenders tighten borrowing criteria. Businesses with weak credit scores or inconsistent cash flow struggle to secure funding, and small businesses feel this the most.
Higher rates also discourage borrowing. Entrepreneurs who might have jumped at a 9% startup loan may hesitate at 14% or higher, delaying growth plans.
Impact on Business Growth and Expansion
Business expansion often relies on financing—whether it’s opening a new branch, investing in equipment, or hiring staff. But when interest rates climb, borrowing becomes riskier.
Take a local retailer planning to open a second location. If loan repayments eat into cash flow, they may postpone expansion or seek alternative business funding options in South Africa.
How Low Interest Rates Benefit Businesses
When interest rates drop, businesses gain more financial breathing room. Lower rates mean cheaper borrowing, making it easier to expand, invest, or simply manage day-to-day cash flow.
Lower Repayment Burdens
A lower interest rate directly reduces your monthly loan repayments. Less interest means more cash left over for reinvesting in your business.
It also shortens repayment time. If your business maintains the same monthly instalment on a lower-rate loan, you can pay it off faster—saving on total interest costs.
For example, let’s say you borrow R500,000 over five years:
- At 10% interest, your monthly repayment is around R10,600.
- At 5% interest, that drops to R9,400—saving you R1,200 per month.
That difference adds up. Over five years, it’s an extra R72,000 kept in your business.
Easier Access to Business Financing
Lower interest rates encourage banks and lenders to approve more loans. With borrowing costs down, lenders take on more risk, making it easier for startups and SMEs to access funding.
This especially benefits businesses struggling to qualify for loans in a high-rate environment. Lower rates also allow businesses to refinance existing debt, swapping expensive loans for cheaper options.
Encouraging Business Expansion
When borrowing is cheap, businesses feel more confident about investing. Expansion loans become more affordable, helping businesses scale operations, hire staff, and invest in new equipment or inventory.
For example, a manufacturing business might delay upgrading machinery when interest rates are high. But when rates fall, the cost of financing a new production line becomes manageable, boosting efficiency and output.
Fixed vs. Variable Interest Rates: Which Is Better?
Choosing between fixed and variable interest rates can be a make-or-break decision for your business. Each option has its advantages and risks, and the best choice depends on your business’s financial stability and risk tolerance.
Fixed Interest Rates: Pros and Cons
With a fixed interest rate, your repayments stay the same throughout the loan term.
Pros
- Predictable payments make budgeting easier.
- No surprises—you won’t be hit by rising rates.
Cons
- Higher initial rate than variable options.
- Less flexibility—you won’t benefit if rates drop.
Fixed rates suit businesses that prefer stability and want to lock in predictable repayments.
Variable Interest Rates: Pros and Cons
A variable interest rate fluctuates based on market conditions and is often linked to the South African Reserve Bank’s repo rate.
Pros
- Lower starting rate than fixed loans.
- Potential savings if rates drop.
Cons
- Unpredictable repayments—harder to budget for.
- Higher risk—if rates rise, loan costs increase.
Variable rates are ideal for businesses that can handle some uncertainty and want to take advantage of possible rate cuts.
Which Option Is Best for Your Business?
- If interest rates are expected to rise, fixed rates provide stability.
- If you can handle some risk and expect rates to fall, a variable rate could save you money.
- Businesses with tight cash flow should opt for fixed rates to avoid unexpected cost spikes.
Strategies to Get the Best Business Loan Interest Rate in South Africa
A lower interest rate can save your business thousands. Here’s how to secure the best possible deal.
Improve Your Business Credit Score
Lenders reward businesses with strong credit scores by offering lower interest rates. A poor credit rating, however, means higher borrowing costs—or even business loan rejection.
To boost your credit score:
- Pay bills on time—late payments hurt your score.
- Reduce existing debt—high debt levels raise risk.
- Check your credit report—fix any errors that could be dragging it down.
Choose the Right Type of Loan
Not all business loans are created equal. Some carry higher risk for lenders, leading to higher interest rates.
- Secured loans (backed by assets) usually have lower interest rates.
- Unsecured business loans cost more because there’s no collateral.
- Government-backed loans often offer lower rates for startups and SMEs.
Negotiate with Lenders for Better Rates
Never accept the first loan offer—shop around and use multiple offers as leverage.
- Compare lenders using online business loan comparison tools—different banks have different risk appetites.
- Show strong financials—healthy cash flow improves your bargaining power.
- Ask about rate discounts—some banks offer lower rates for loyal customers or businesses with strong credit profiles.
Frequently Asked Questions: Interest Rates Affect Business Loans in South Africa
How Does the South African Reserve Bank (SARB) Affect Business Loan Interest Rates?
The SARB sets the repo rate, which directly impacts the prime lending rate banks use. When SARB raises the repo rate, borrowing costs increase, making loans more expensive. When it lowers the repo rate, banks can offer cheaper loans, making financing more accessible for businesses.
Should I Choose a Fixed or Variable Interest Rate for My Business Loan?
The choice depends on how much risk your business can handle. Fixed rates keep repayments stable, protecting you from future increases, but they start higher than variable rates. Variable rates are usually lower at the start but can fluctuate over time. If interest rates drop, you save money—but if they rise, repayments become unpredictable.
How Can I Lower My Business Loan Interest Rate?
A strong credit score and healthy business finances help secure better rates. Lenders also offer lower rates on secured loans, where assets back the loan. Comparing lenders and using multiple offers as leverage can also help negotiate better terms.
Why Do Small Businesses Struggle More When Interest Rates Rise?
Higher interest rates mean higher borrowing costs, which can tighten cash flow for smaller businesses. Lenders also become stricter with approvals, making it harder for startups and SMEs to qualify for loans. This can slow down growth or force businesses to delay expansion plans.
Can I Refinance My Business Loan if Interest Rates Drop?
Yes! If rates go down, refinancing can help reduce monthly repayments or let you pay off the loan faster. However, watch for refinancing fees or early repayment penalties, as these could cancel out the savings. Always check the numbers before making a move.
