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It’s Not All About The Rate!
Business finance is very different from consumer finance, which in itself is not always what it seems, and unfortunately consumers forget that banks are businesses too and are very good at telling people what they want to hear. Cases are low interest rates.
What they don’t know is that aside from the rate, there are many additional costs that when added into the equation increase the total cost of the loan which makes the initial rate not so attractive.
Let me give you an example that rate is not the only consideration. Let’s say you need an 850K business loan and the bank has 2 options:
- 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
Another option would be a whopping $4,900 cheaper in year 1 and $1,250 pa thereafter.
It’s more mixed for business loans which are mainly based on risk, if you look at most banks’ advertised rates you’ll see a * symbol next to the advertised number, which means you could get a better or worse rate depending on the risk. Make sure you get the good rate you need to show strong security, cash flow, proven history, make sure you have systems in place as these will all help portray your business in a strong light that minimizes risk and minimizes risk. Reduced, the better deal you’re 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, depending on the time factor, may have a lot of equity in the assets securing their facility. The business may incur unnecessary costs and may also limit future lending opportunities.
If you’ve never had your loan reviewed and are still on the same deal I highly recommend you chat to your broker as there’s a good chance you’ll get a much better deal.
Here are 5 things to consider when reviewing your loan:
- When was the last time you renegotiated? – Once you have 2 years of good company financials, it’s time to talk, the best time to keep finance is when you’re doing well.
- Free up some equity – If the bank took all your assets as security when you entered into the original loan, the situation can be very different now and we can free up some of your equity by reviewing your current debts. This in turn allows you to invest in the future.
- Tax Efficiency – Make sure your personal loan is separate from business/investment loans, pay off the personal loan first, as there are no tax deductions on personal loans.
- Run things through with your accountant for structure and tax – Talk to your accountant and get advice to make sure the new structure is tax efficient for you again. I always insist on checking with my clients to see if a new design works for their individual situation.
- Consider Fixing – Consider fixing the facility or a portion of the facility as this can provide some stability to your cash flow as you won’t have rates going up and down, however read the small print if you plan to pay off the loan in the near future and at least one portion is variable. Leave so you can pay it without penalty.
So basically, don’t just look at rates, take the time to understand the differences between the loans on offer and show your broker the total cost to you and most importantly… the savings!
To give you a good example, I recently completed a simple re-finance and restructuring for one of my clients who is a contract civil engineer and property investor with a large portfolio of both commercial and residential properties. The rate savings was only 0.6% over what he was currently paying, however the simple change that we restructured all of his loans, took the savings we created and deposited them into his home loan (without tax deductions) wiped out 5.7 years on the home. loan with a savings of $141,305 in interest payments without making any changes to his current payments.
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