Interest rates are at an all time low. The current interbank benchmark rate for business loans, known as BBSY, and referred to as the reference rate in most corporate lending arrangements, is currently sitting at about 1.7%. Banks are then applying a margin above this (made up as either pure interest margin or interest and fees) depending on how risky you are, and how much profit they care to make from you. So what is the best bank rate for you to pay for your business finance?
There are lots of things that will influence a bank’s calculation. Security comes into it heavily. The better the security (ie more liquid) and the less you borrow against it will be key drivers of rate. This is why mortgage lending rates are so low. We are regularly sourcing home loans for clients at less than 4% currently. This implies that if you take a residential property to a bank, and borrow less than 80% of its value, and your business is performing reasonably well, then your business should command a margin of around about 2.3% (ie BBSY of 1.7% + 2.3% = 4%).
However banks will quickly tell you that commercial lending is more risky than home lending and therefore if you want a business loan, you will pay more for it. Why? Well the bank will tell you that the costs to the bank of managing a commercial loan exceed those of managing a residential loan, and the probability of a commercial borrower defaulting on the loan is far greater than a residential borrower. We will never know how much of this is true and how much of this is a good excuse to pump the rates up.
What we do know though is that in commercial banking the rates are far less visible than mortgages and as such they tend to vary a lot more. For instance early in 2016, we witnessed, albeit anecdotally, a very obvious drop in rates for businesses offering commercial property as security. At one stage there we were regularly seeing clients (admittedly borrowing >$5m in most instances) being offered interest margins less than 1.5% above BBSY. This would mean today that the overall rate for these clients would currently be 3.2% – Wow! However in the last 6 months, bank pricing for very similar deals has increased significantly and the same clients would likely be paying at least 2x if not nearly 3x this – ie north of 5% Hence today the margins being offered to clients are far closer to 3%. What has changed? The client is the same. The ecomony is as uncertain as it was a year ago – its not great, but its not bad either. The main thing to change is bank profitability. In the recent profit announcements, each of the banks have shown a material reduction in profitability and returns. Ouch!
So how do you know you have a good deal? Well the short answer is, it’s hard unless you are checking all the time across many lenders as we are. The most accurate way for you to test the market is to run a tender but you kind of have to be prepared to move if your current bank is not prepared to meet/ exceed the market. We can help you with this. The alternative is to ask us . Because we are playing in the market all day we have a good idea of what is reasonable. We don’t have the bank’s risk grade machines. We will never be definitive, as pricing and risk grading is not an absolute science. But we know high rates and we know low rates, and we know where the market is set today. If you would like to understand whether you have a good deal, or find that your banking relationship is floundering, there is no cost to come and see us (or invite us to come and see you!). We’d love to help….