How Do Business Loans Work?

What Options Are Available To You?

Traditionally the “Big Four” banks have all offered pretty much the same stuff. That is if you want to borrow money for a business purpose the price goes up. As well as this you need to track down a banker that can take the time to understand your business and appreciate things from your side of the desk, not just the Credit Department’s side of the desk.

There is not question, its getting harder and harder to get good service in the Small to Medium Business, (SME), sector. In fairness to the “Big Four” its hard for them as well. They want it do but they are pushing their managers, branches and infrastructure in general as hard as they can and that rarely co-exists with relationship building and great service.

Its not just pricing and access to good service or advice that makes loans for SME’s hard everything else gets harder as well.

Here’s How Business Loans Can Get Harder

  • The loan term might be restricted putting cashflow pressure on your business

  • The interest rate is generally higher as the lender has the perception that the loan carries more risk, this has always perplexed me as the lender is in effect saying that they consider you managing your own business is riskier that you earning a salary from another business owner that they literally know nothing about – go figure.
  • The bank will want to see your financials every year and sometime half yearly. This is expensive. Agreed you need to do your end of year taxation figures but if you do them every 6 months your accounting bill just doubled. Recently I was quoted between $1500 and $3000 for the preparation of interim financials for a client.
  • Monthly fees get added to your loan. Often this is simply a great way of masking the real cost of your loan. For example, I am aware of one of the “Big Four” that charges 1.7% of the overdraft loan amount as an account keeping fee. This means your interest rate just went up by 1.7%pa whether you use the money or not. Even a “set and forget” term loan will cost you around $750 each and every year.
  • Valuations may need to be done every two or three years to give the bank assurance that their security position is maintained.
  • Your loan amount is generally limited to 65 – 70% of the value of the security property.

Take this example of a commercial loan of $750 0000 for the purchase of a commercial warehouse.

Commercial loan of $750,000 at 5.42% pa

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How Do Business Loans Work?

How Do Business Loans Work? What Options Are Available To You? Traditionally the “Big Four” banks have all offered pretty much the same stuff. That is if you want to borrow money for a business purpose the price goes up. As well as this you need to track down a banker that can [...]

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Looking at the loan in simplistic terms you would say the cost is 5.42%pa or $40650 each year in interest. However, when you look at all the other associated costs the bank is charging an average of $44890 per year. Effectively that’s 5.96%pa. or put another way an additional $21 200 over the 5 year period.

In addition to this you have the hassle, and anguish, of having to prepare interims and hope that the bank remains happy.

Every time you provide your lender information you risk something changing that you may not have anticipated. The opposite can be true but that’s usually only because you know how to “work the system”.

When was the last time your bank manager rang you up and offered to reduce your lending costs?
When was the last time your bank manager called you?

Consider This

Firstly, let’s be clear – you do not have to move your transaction banking.
Commercial lenders love you transactional banking accounts. It gives them your funds on deposit for free, the ability to charge account keeping fees and the ability to look inside your business – without you knowing.

New ways of funding commercial loans are out there. For example set and forget commercial loans and sometimes at home loan rates. Why would you pay commercial interest rates, have a shortened loan term and prepare interim financials if the bank could use equity in your home for your commercial loan?
You can make this happen if you know which lenders to talk to and how to go about it. No disruption to your business banking accounts, your internet banking or credit cards – just cheap efficient loan accounts.

Even if you prefer to, or already have offered your commercial premises as security rather than your home, (or a mix of the two), you can have a set a forget commercial loan with no ongoing fees over 20 years. There is of course always the option to go interest Only as well.
Consider the information below, it’s for the same $750 000 that we looked at earlier.

Commercial loan of $750,000 at 4.89% pa

In this example the same loan costs an average of $37 087pa. over a 5 year period. That’s effectively 4.94%pa. (compared to 5.96%pa above).
The only thing that has changed is we did it smarter!

All your day to day banking stays in place uninterrupted. The cost of making the changes, (assuming an application fee of $1000 and a valuation fee of $1060) would be recovered in a couple of months.

It’s All About Who You Know

Not all lenders are the same.

The market is super competitive at the moment with fintech innovators and new banks coming into the market and in particular into the commercial market. It’s no longer the exclusive domain of the “big four”. Many of these lenders are choosing to get to their clients via brokers. Its gives them the benefit of cheaper distribution channels but more importantly reduces their costs which are then reflected in what they charge you, the borrower.
More importantly they are hungry to do business and there are many ways that we can take advantage of this. You can take advantage of it all, with a little help from someone in the know.

Understanding the lenders and their niches and combining that with finding the right people inside these lenders is always far more likely to get you a suitable and sustainable outcome that might be just right for you. Sometimes it’s a combination so lenders or lender products, sometimes it’s a “re-jig” of your loan products after come consultation with your accountant. Sometimes it’s about releasing a security property like the family home for example and sometimes it’s about separating out your liability from that of your business partner’s liability.

It’s A Bit Like Goldilocks And The Three Bears

The three Big Bears are:

  1. Why do commercial loans cost so much?
  2. Why do I need to spend so much money and time simply maintaining the loan going forward?
  3. How do I find the right bank and bank manager that has the time to understand my business?

Goldilocks is obviously “Just right”. That is a combination of a well priced maintenance free loan portfolio with the support of an experience broker that can ensure that your needs are understood and met by the lender on an ongoing basis.

The one thing for sure is that it’s not just a matter anymore of turning up to your local branch, filling in a form and hoping for the best!

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