Business finance is very different to Consumer finance, which in its self is not always what it appears to be and unfortunately consumers tend to forget that banks are businesses as well and they are very good at appealing to what the public like to hear which in most cases is a low interest rate.
What they don’t know is that with rates aside, there are many additional costs that when added into the equation increase the overall cost of the loan which makes that initial rate not quite so appealing after all.
Let me give you an example of how rate is not the only thing to consider. Lets say you require a 850K business loan and the bank has 2 options available:
- Commercial Bill – 0.5% application, 4.90% interest, 2.75% Line fee $175 30 day roll over fee
- Standard Loan – $600 application, 7.75% interest 0 ongoing fees
The second option will be a whopping $4,900 cheaper in year 1 and $1,250 pa going forward.
This is further compounded for business lending which is based primarily on risk, if you look at most bank’s advertised rates you will see the * sign next to the advertised number, which means you might get a better or worse rate depending on the risk, to ensure you will get the better rate you need to demonstrate strong security, cash flows, proven history, ensure you have systems in place as these will all help to portray your business in a stronger light which in turn reduces the risk and once the risk is reduced, the better deal you are likely to get.
Many businesses are in a stronger financial position now than when they first started yet they are still paying the same rate and it’s also likely that depending on the time factor, they may have a lot more equity in the property which is securing their facility, which can be costing the business unnecessary expense and also limit the opportunity of future lending.
If you have never reviewed your loan and are still on the same deal then I would strongly recommend that you have a chat with your broker as there is a very high possibility that you can get a much better deal.
When reviewing your loans here are 5 things to consider:
- When was the last time you renegotiated? – Once you have 2 solid years of good company financials its time to talk, the best time to put finance in place is when you are doing well.
- Free up some equity – When you entered into the original loan the bank may have taken all of your assets as security whereas now the situation may be very different and by reviewing your current loans it is possible that we can free up some of your equity which in turns allows for you to make future investments.
- Tax Effectiveness – Make sure your personal debt is separate to business/investment debt, pay the personal debt off first, as there are no tax deductions on personal debts.
- Run things past your accountant for structure and tax – Again make sure the new structure is tax effective for you so talk to your accountant and get advice. I always insist my client’s check that the new structure works for their personal situation.
- Consider Fixing – Consider fixing a facility or a portion of a facility as this can put some certainty into your cash flow going forward as you will not be exposed to movements in the rates either up and down, however read the small print if you are planning paying out debt in the near future and leave at least a portion variable so you can pay it out without penalties.
So basically, don’t just look at the rate, take the time to understand the difference with the loans on offer and get your broker to show you the overall costs and above all… the savings!
To give you a good example I have just completed a simple re-finance and restructure for a client of mine who is a contracted civil engineer & property investor with a large portfolio of both commercial & residential property. The rate saving was only 0.6% on what he was currently paying, however we restructured all of his loans, took the saving that we had created and deposited that into his home loan (Non tax Deductible) This simple change wiped 5.7 years off the home loan along with a saving of $141,305 in interest payments with no change to his current payments.