This article is for general information only. It does not constitute financial advice. Loan structures, rates, and terms vary by lender and borrower circumstances. Always seek independent financial advice before making decisions about your debt structure.
When the Reserve Bank of Australia raises the cash rate, not every business feels it the same way. Large corporates with fixed-rate debt locked in at lower rates barely notice. Small businesses on variable rate loans feel it immediately.
This structural difference in how businesses borrow is one of the least discussed but most consequential factors in small business financial health. Australian SMEs carry a disproportionate share of their debt on variable rates, which means monetary policy transmits faster, harder, and with greater cash flow impact to small businesses than to large ones.
This article explains the variable rate exposure gap, models the real cash flow impact of rate movements, and outlines what business owners can do about it.
RBA Statistical Table D14 breaks down business finance outstanding by business size and interest rate type. The data consistently shows that small businesses hold a significantly higher proportion of their debt on variable rates compared to medium and large businesses.
The pattern has deep roots. As far back as 1994, the RBA's original analysis of small business lending found that smaller businesses relied more heavily on variable rate products like overdrafts and revolving credit facilities. While the exact composition has shifted over the decades as lending products have evolved, the structural skew toward variable rates for SMEs has persisted.
Current D14 data shows that approximately 70% to 75% of small business debt is on variable rates, with the remainder on fixed rates or bill facilities. Large businesses maintain a more balanced mix, with a greater share locked into fixed rates.
This is not a choice made from a position of strength. Small businesses are pushed toward variable rate products for several reasons. Variable rate loans offer more flexibility (draw down and repay at will), they often have lower upfront rates than fixed alternatives, and many small business lending products (like overdrafts) are only available on variable terms. Fixed rate business loans typically require larger facility sizes and more established credit histories, which many small businesses lack.
When the RBA changes the cash rate, that change flows through to variable rate borrowers almost immediately. Most major lenders pass through rate changes within days. Fixed rate borrowers are insulated until their loan matures or refinances.
For a business with 75% of its debt on variable rates, a 0.25% rate increase affects three quarters of its borrowing costs instantly. For a large business with 50% on fixed rates, only half of its debt is affected, and the impact is delayed.
The practical cash flow impact is significant. Consider a business with a $750,000 total debt position, of which $562,500 is variable (75%). A 0.25% rate increase adds approximately $1,406 per year in extra interest on the variable portion alone. A 1.00% cumulative increase (four 0.25% moves) adds $5,625.
For a business with annual revenue of $3 million and a 12% profit margin ($360,000 pre-tax profit), that $5,625 represents about 1.6% of profit. Not catastrophic on its own, but it compounds with every other cost increase the business is absorbing: wages, insurance, energy, rent.
Now consider the full rate hiking cycle from April 2022. The cash rate increased by approximately 425 basis points over that period. The RBA's 2024 bulletin confirmed that SME variable lending rates increased by around 365 basis points. On a $562,500 variable facility, 365 basis points adds approximately $20,530 per year in additional interest. That is the equivalent of a part-time employee's salary, extracted from the business through higher debt servicing costs.
The 2025 easing reversed some of this, with SME variable rates declining by a little more than the cash rate (approximately 85 basis points vs 75 basis points in cash rate cuts), reflecting increased lender competition. But the February 2026 increase clawed back 25 basis points of that relief immediately.
For many small business owners, the variable rate exposure extends beyond the business itself. RBA data shows that approximately 48% of all small business credit is secured by residential property. This means the business owner is simultaneously servicing a variable rate business loan and, in many cases, a variable rate home mortgage secured against the same property.
When rates rise, these owners get hit on both sides. Their business debt servicing costs increase, and so does their personal mortgage. The combined impact on household and business cash flow is substantially larger than either one in isolation.
The RBA's Small Business Finance Advisory Panel has repeatedly highlighted this dynamic. Several panellists reported choosing to fund their business entirely through equity specifically to avoid the risk of having their home tied to a variable rate business loan. Others described the inflexibility and risk of loan products as a key deterrent.
This double exposure creates a feedback loop. When rates rise, business cash flow tightens, which can mean the owner draws less income from the business, which makes the personal mortgage harder to service, which increases overall financial stress. For businesses in the high-stress sectors identified in the financial stress report (hospitality, construction, retail), this feedback loop is already active.
The 2025 easing provides a useful case study. As the cash rate declined, the RBA's October 2025 bulletin confirmed that variable SME lending rates declined by a little more than the cash rate. This was driven by increased competition, with banks actively competing for SME business and non-bank lenders gaining market share.
This was good news for variable rate borrowers. The same sensitivity that makes rate hikes painful makes rate cuts immediately beneficial. Businesses on variable rates felt the relief quickly.
However, the February 2026 cash rate increase to 3.85% reversed some of that benefit. Over 30 lenders passed through the full 0.25% increase, and variable rate borrowers absorbed the higher cost immediately. Fixed rate borrowers were unaffected.
This is the core vulnerability. Variable rate exposure is a two-edged sword: it amplifies both the pain of hikes and the benefit of cuts. But most business owners do not plan for this symmetry. They take the cuts with relief and are caught off guard by the hikes.
You cannot eliminate variable rate exposure entirely, and for some businesses, maintaining variable rate flexibility is the right choice. But you can manage the exposure deliberately rather than by default.
Start by understanding what you actually have. What proportion of your total business debt is on variable rates? What proportion is fixed? What are the maturity dates on your fixed rate facilities? Many business owners do not know these numbers off the top of their head, and that is the first problem.
Run a simple scenario: if rates go up 0.50% from here, what does that cost me per month? What about 1.00%? If the answer makes you uncomfortable, your variable exposure is too high for your risk tolerance.
You do not need to fix all of your debt. Many businesses benefit from a split structure where a portion is fixed (providing predictability on core debt servicing) and a portion remains variable (providing flexibility for draw-down and repayment). Your bank or broker can model split structures for you.
If you maintain variable rate debt, build an interest rate buffer into your forward cash flow projections. Assume rates are 0.50% to 1.00% higher than they currently are, and ensure your business can still service its debt at that level. This is what lenders do when they assess your application. You should do it for your own planning.
From July 2026, employers will be required to pay superannuation at the same time as wages rather than quarterly. For a business with $500,000 in annual payroll, this brings forward approximately $57,500 in super payments (at the 11.5% rate) by up to 12 weeks. The exact impact varies by state and by how your payroll cycle is structured, but the cash flow effect is real. Combined with variable rate debt exposure, this creates an additional pressure point that should be planned for now, not when it arrives.
Approximately 70% to 75% of small business debt is on variable rates, based on RBA Statistical Table D14 data. This is significantly higher than for large businesses, which maintain a more balanced split between variable and fixed.
Almost immediately. Most lenders pass through RBA cash rate changes within days for variable rate business loans. Fixed rate borrowers are unaffected until their loan matures or refinances.
It depends on your risk tolerance, cash flow stability, and view on future rate movements. Start by auditing your current exposure. If more than 75% of your debt is variable and a 0.50% rate increase would cause material cash flow stress, partial fixing is worth exploring. Businesses that value predictability and have stable revenue are typically better suited to fixed rate structures. A split approach often provides the best balance.
On a $500,000 variable rate loan, a 0.25% increase adds approximately $1,250 per year in extra interest. On $750,000, approximately $1,875. On $1 million, $2,500. The cumulative impact of multiple increases is what creates real pressure.
Several factors contribute: variable rate products like overdrafts offer more flexibility, fixed rate products often require larger facility sizes and established credit histories, and many standard small business lending products are only available on variable terms. The skew is partly a product of limited choice rather than deliberate strategy.
From July 2026, employers must pay superannuation at the same time as wages instead of quarterly. For a business with $500,000 in annual payroll, this brings forward approximately $57,500 in super payments (at the current 11.5% rate) across the year. The exact timing impact depends on your state, payroll frequency, and current payment practices. Combined with variable rate debt servicing, this creates a compounding cash flow pressure that requires advance planning.
RBA Statistical Table D14: Lending to Business by Business Size and Interest Rate Type: https://www.rba.gov.au/statistics/tables/
RBA Statistical Table F7: Business Lending Rates: https://www.rba.gov.au/statistics/tables/
RBA Bulletin October 2025: Small Business Economic and Financial Conditions: https://www.rba.gov.au/publications/bulletin/2025/oct/small-business-economic-and-financial-conditions.html
RBA Bulletin October 2024: Small Business Economic and Financial Conditions: https://www.rba.gov.au/publications/bulletin/2024/oct/small-business-economic-and-financial-conditions.html
RBA Insights from the New Economic and Financial Statistics Collection (2020): https://www.rba.gov.au/publications/bulletin/2020/sep/insights-from-the-new-economic-and-financial-statistics-collection.html
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