It’s not just about the rate!

Business finance is very different from consumer finance which itself is not always what it seems and unfortunately consumers tend to forget that banks are businesses too and they are very good at addressing what The public’s favorite case to hear is a low interest rate.

What they don’t realize is that there are many additional costs along with the interest that, when factored into the equation, add to the overall cost of the loan, making this initial rate not quite as attractive after all.

Let me give you an example that interest rate is not the only thing to consider. Let’s say you need a business loan of 850,000 and the bank has 2 options:

  1. Commercial invoice – 0.5% application, 4.90% interest, 2.75% line fee $175 30 day rollover fee
  2. 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 per year going forward.

This is amplified for business loans that are primarily risk based. If you look at the advertised rates of most banks, you will see the * sign next to the advertised number, which means you can get a better or worse rate depending on your risk. Make sure you get the better rate you are getting need to demonstrate strong security, cash flows and a proven history. Make sure you have systems in place as these all help present your business in a stronger light which in turn reduces risk and once the risk is reduced the better off you are likely to be.

Many businesses are now in a stronger financial position than they were when they started but are still paying the same rate and are also likely to have a lot more equity in the property depending on the time factor which can save the business from unnecessary expenses cause and also limit the possibility of future lending.

If you have never checked your loan and are still getting the same deal I would strongly recommend speaking to your broker as there is a very good chance you will get a much better deal.

When reviewing your loans, here are 5 things to keep in mind:

  1. When was the last time you renegotiated? – Once you’ve had 2 solid years with good company finances, it’s time to talk about it. The best time to set up financing is when you are doing well.
  2. Free up some equity – When you made the original loan the bank may have taken all of your assets as collateral, while the situation may be very different now and by reviewing your current loans it is possible that we have taken some of your equity in turn, enables you to make future investments.
  3. Tax Effectiveness – Make sure your personal debt is separate from business/investment debt, pay off personal debt first as there are no tax deductions on personal debt.
  4. Run things past your accountant for structure and taxes – Again, make sure the new structure is tax effective for you, so speak to your accountant and get advice. I always insist that my client verify that the new structure is suitable for their personal situation.
  5. Consider fixing – Consider fixing a facility or part of a facility as this can give some certainty to your future cash flow as you will not be exposed to fluctuations in interest rates up or down. However, read the fine print if you plan on paying off debts in the near future and leave at least a portion floating so you can pay them off without penalties.

So basically don’t just look at the interest rate, take the time to understand the difference between the loans on offer and let your broker show you the total cost and most importantly the savings!

To give you a good example, I just completed a simple refinance and restructuring for one of my clients who is a civil engineer and real estate investor with a large portfolio of commercial and residential properties. The interest savings was only 0.6% of what he was currently paying, but we restructured all of his loans, took the savings we created and put them into his home loan (not tax deductible). This simple change wiped the home 5.7 years off the loan along with saving $141,305 in interest payments with no change to its current payments.