Quick answer
When the interest-only period on a business loan ends, the loan usually switches automatically to principal and interest, so each repayment starts reducing the debt and gets noticeably bigger. You can let it roll over, ask your lender to extend the interest-only period, refinance, stretch the remaining term, pay down a lump sum or sell the asset. Start planning at least three to six months before the switch date.
Key points
- Most interest-only periods roll to principal and interest automatically. Nobody has to sign anything.
- The jump is often bigger than owners expect, because the debt is repaid over a shorter remaining term.
- Extending, refinancing or restructuring all take time. Start three to six months out.
- Principal repayments generally aren't tax-deductible, so the cash hit after tax is bigger than the repayment rise suggests.
A letter arrives from your lender. It’s polite, a little dull, and easy to file under “later”. Somewhere in the second paragraph it says your interest-only period finishes on a date that’s now a few months away, and your new repayment will be a noticeably bigger number.
That letter deserves your attention today. The switch from interest-only to principal and interest is one of the most predictable events in business lending, and yet plenty of owners only start planning once the first bigger repayment has already left the account. The good news: if you have a few months up your sleeve, you have real choices.
What actually happens when the interest-only period ends?
For a set period, often somewhere between one and five years on business loans, you’ve been paying only the interest. The amount you borrowed hasn’t moved. On the date written into your loan contract, the loan normally converts to principal and interest (P&I). From then on, every repayment covers the interest and chips away at the debt.
Moneysmart’s explanation of interest-only loans is written for home loans, but the mechanics are the same for business lending: at the end of the period, the loan will “change to a ‘principal and interest’ loan” and you start repaying the amount borrowed as well as the interest.
A few things that surprise owners:
- It’s usually automatic. You don’t have to agree to anything. The new repayment simply starts.
- The term doesn’t restart. If you had a 15-year loan with three years interest-only, the full balance is now repaid over the remaining 12 years, not 15. That’s why the jump is steeper than a normal P&I loan would have been from day one.
- The lender may review you anyway. Some facilities, especially those with annual reviews or covenants, come up for a look around the same time.
How big will the repayment jump be? (illustrative)
Here’s a made-up example to show the shape of it. It’s not a real client and the figures are rounded.
Jess owns a small craft brewery outside Geelong. Three years ago she borrowed $400k against the brewery’s industrial unit to fit out the brew house, with the first three years interest-only so the cash could go into kegs, tanks and distribution. Her loan has a 15-year term in total.
| Interest-only years | After the switch to P&I | |
|---|---|---|
| Amount owing | $400k (unchanged) | $400k, falling each month |
| Monthly repayment | About $2,700 | About $4,350 |
| Extra cash out per year | — | Roughly $19,800 |
| What reduces the debt | Nothing | Every repayment |
An extra $19,800 a year is a new part-time wage, or a few tanks of stock, that has to come from somewhere. And because principal repayments generally aren’t a tax deduction, the after-tax pinch is sharper than the table suggests. Jess’s accountant should model that for her, and yours should model it for you.
To see how a bigger repayment fits against your own income and quiet months, run your numbers through our cash-flow gap estimator.
What are your options before the switch?
There’s no single right answer. The best path depends on how the business is trading, what the loan funded and whether you’d planned an exit. Here are the main options side by side.
| Option | How it works | Suits you if… | Watch out for |
|---|---|---|---|
| Let it roll to P&I | Do nothing; new repayments start on the switch date | Cash flow comfortably covers the new figure | Check the exact dollar amount first |
| Ask for an extension | Your lender grants a further interest-only period | The original plan is still on track, just slower | Usually a fresh credit assessment, sometimes a valuation |
| Refinance | Move the loan to a new lender with a structure that fits now | Trading or property value has improved | Exit costs, new fees and the time it takes |
| Stretch the term | Repay the balance over a longer remaining term | You want lower P&I repayments without staying interest-only | More total interest paid over the life of the loan |
| Pay down a lump sum | Reduce the balance before the switch | You have surplus cash, an asset to sell or a payout coming | Don’t strip out the working capital you need |
| Sell or restructure the asset | Sell the property or equipment the loan funded | Interest-only was always meant to bridge to a sale | Allow for sale timing and selling costs |
Rolling over: the “do nothing” option
If the business has grown into the loan, this can be perfectly sensible. Paying down debt steadily is how most owners build equity. Just confirm the new repayment in dollars and make sure the switch doesn’t land in your quietest month without a buffer.
Extending interest-only
Lenders will often consider it, but expect them to look at the business fresh. That means recent financial statements, BAS and business bank statements, and possibly a property valuation. business.gov.au’s guide to applying for a business loan lists the sort of paperwork lenders ask for, and it applies just as much when you’re asking an existing lender for a change. Have a clear reason ready: “the second production line comes online in March” lands better than “cash is tight”.
Refinancing or restructuring
If your current lender says no, or the deal it offers doesn’t suit, a refinance can reset the structure. Property-backed options such as a first mortgage business loan can sometimes spread repayments over a longer term. If the interest-only loan is one of several debts, rolling them together through business debt consolidation may simplify things into one repayment.
Not sure which path suits your loan? You can tell us about it and a real person will talk through the options with you, with no obligation.
Why does the timing matter so much?
Most of the options above need a lender to say yes, and lenders need documents, sometimes a valuation, and a bit of time. Leave it until the final month and you may have only one realistic choice left: pay the new repayment, ready or not.
A simple countdown helps:
- Six months out: Find the exact switch date in your loan contract or online banking. Ask the lender for the new repayment amount in dollars.
- Four to five months out: Get your financials and BAS up to date. Run the new repayment through your cash-flow forecast, including your slow season.
- Three months out: Decide your direction: roll over, request an extension, refinance or pay down. If you’re asking for an extension or a refinance, apply now.
- One month out: Confirm the outcome in writing. If you’re rolling over, move a buffer into the repayment account.
- Switch month: Check the first P&I repayment comes out as expected.
Ninety days before the switch is the line that matters most. Inside that window, a declined extension or a slow valuation can leave you with no time to try anything else.
What do lenders want to see if you ask for more time?
Whether you’re asking your current lender for an extension or applying elsewhere, the questions are much the same:
- Can the business afford P&I now, or soon? Lenders like to see a path to paying down debt, not an endless interest-only loop.
- What did the original interest-only period achieve? If it funded a fit-out that’s now earning, say so with numbers.
- What’s the property or asset worth today? A higher value may support a better structure. A lower one may limit options.
- Is anything else going on? ATO debt, other loans, or recent late payments all come into the picture. Be upfront about them.
It also helps to understand why interest-only was chosen in the first place. Our guide on matching the loan to the job explains how term and structure should line up with what the money funded, and our explainer on repayment structures covers how interest-only compares with balloons and P&I.
What if the new repayments simply aren’t affordable?
Then the most important thing is to say so early, before a repayment is missed. The Australian Banking Association’s financial assistance hub encourages customers to contact their bank “as early as possible”, and many lenders have dedicated teams for business customers under pressure. Options can include restructuring the loan or deferring principal for a period while trading recovers.
The free Small Business Debt Helpline (1800 413 828) is another good first call if you want independent help working out where you stand.
What not to do: cover the gap with expensive short-term debt stacked on top. That can turn a manageable step-up into a much bigger problem.
Ready to turn the switch date into a plan?
An interest-only period ending isn’t a crisis. It’s a deadline you can see coming, and that’s an advantage. Owners who start early can choose between rolling over, extending, refinancing or restructuring. The ones who wait usually just get the bigger repayment.
If you’d like a second set of eyes on your loan before the switch, we’re happy to help. Enquiring takes about 60 seconds and your credit file isn’t touched just for asking. We won’t send your details to a pile of lenders, so your phone won’t light up with strangers. A real person reads your enquiry, looks at the loan, the switch date and how your business is trading, then calls you to talk it through. Please fill the form in accurately, including what you owe, the property or asset behind the loan and when the interest-only period ends, so we can find the right option first time.
Frequently asked questions
What happens when the interest-only period ends on a business loan?
In most cases the loan switches to principal and interest on the date in your loan contract. Repayments rise because you start repaying the amount borrowed as well as the interest, usually over whatever term is left on the loan. The lender normally writes to you before it happens, but the switch doesn't wait for your reply.
Can I extend the interest-only period on my business loan?
Often you can ask, but it isn't automatic. The lender will usually treat it like a fresh credit decision and may want updated financials, BAS, bank statements and sometimes a new valuation of the property. Ask early, because if the answer is no you'll want time to refinance or restructure.
How much will my repayments go up when interest-only ends?
It depends on the loan balance, the term left and your loan's pricing. Your lender can give you the exact new repayment figure, and you should ask for it in dollars well before the switch. As a rough guide, the shorter the remaining term, the bigger the jump.
Can I refinance a business loan that's coming off interest-only?
Yes, and many owners do. A new lender will assess the business as it is today, not as it was when you first borrowed. If trading has grown or the property has risen in value, refinancing can open up a new structure. If trading has slipped, refinancing may be harder, which is another reason to start early.
Are principal repayments on a business loan tax-deductible?
Generally no. Interest on money borrowed for business purposes is usually deductible, but repaying the amount borrowed isn't an expense. So when the interest-only period ends, your deductible interest drops slowly while your cash outgoings rise. Ask your accountant to model the after-tax effect for your business.
What if I can't afford the new repayments?
Talk to your lender before you miss anything. Banks encourage customers in difficulty to contact them as early as possible, and options can include restructuring or deferring principal for a period. The free Small Business Debt Helpline on 1800 413 828 can also help you think through your position.