A standard business term loan uses an amortising schedule, meaning each monthly payment covers the interest charged on the outstanding balance plus a slice of the principal. In the early months, interest makes up most of the payment because the balance is highest. As the balance falls, less interest accrues each month and more of each payment goes toward principal. By the final month the balance is almost zero, so nearly all of that payment is principal. This is the PMT formula in action and it is the same method banks use to quote your repayment.
Why the total cost matters more than the monthly repayment
A longer term lowers the monthly repayment, which can help cash flow in the early years of a business. But a longer term also means more months of interest, so the total you repay grows significantly. On a $150,000 loan at 9.5%, stretching from 5 years to 7 years drops the monthly payment by about $370 but adds roughly $14,000 to the total interest bill. Comparing total cost, not just monthly cost, is the right frame for a business finance decision.
Tax treatment of business loan interest in New Zealand
Interest paid on a loan used to generate assessable income is deductible under the Income Tax Act 2007. For a business, this means the effective cost of borrowing is the interest rate multiplied by one minus your tax rate. At the company tax rate of 28%, a 9.5% loan costs roughly 6.8% after tax. Keep clean records separating business and any private use of loan funds, because only the business-use portion qualifies for the deduction. GST does not apply to interest charged by a registered financial institution, so there is no input credit to claim on the interest component.
Frequently asked questions
What interest rates do NZ banks charge on business loans?
Business term loan rates in New Zealand typically range from 7% to 14% per annum depending on the lender, security offered, and the borrower credit profile. Secured loans backed by property or equipment generally attract lower rates than unsecured facilities. IRD considers interest on a business loan a deductible expense, which reduces the after-tax cost.
Can I claim the interest on a business loan as a tax deduction?
Yes. Under the Income Tax Act 2007, interest on money borrowed and used to earn assessable income is deductible. This means that if you borrow to fund business operations, purchase business assets, or provide working capital, the interest expense reduces your taxable profit. The deduction is not available for any portion of the loan used for private purposes.
How does the PMT formula work?
The standard annuity formula divides the annual interest rate by 12 to get a monthly rate, then solves for the fixed payment that reduces the balance to zero over the number of months. Each payment covers the interest accrued on the outstanding balance first, with the remainder reducing principal. Early payments are mostly interest; later payments are mostly principal.
Should I choose a fixed or floating rate for a business loan?
A fixed rate locks in certainty for budgeting over the term, while a floating rate moves with the OCR (Official Cash Rate) set by the Reserve Bank of New Zealand. Floating rates are typically lower when the OCR is falling, but add risk when rates rise. Many businesses fix for 1 to 3 years and review at rollover, balancing cost and certainty against their cash flow tolerance.