Are you happy with your interest rates? Do you understand the different factors that go into determining your rates? Do you know if you’re getting a good deal? Let’s explore a few of the facts about commercial lending rates.
In the market at the moment (Dec 2014) your average overdraft is comprised of a base rate of around 9.00% plus a 2-3% margin, and commercial term loan rates sit at around 6-8%. Other products such as leases, cash flow facilities and FX vary greatly based on individual factors such as structuring and risk (we’ll discuss these products further in future articles).
The thing to remember is that right now these very low rates correspond to very low margins for bankers. These low margins are due to competing pressures on bankers; the need to meet lending targets in an environment of low lending growth, countered by increasing scrutiny by internal risk departments insisting on high-quality debt.
This dual pressure means that for a business with a strong lending position, i.e. good security, consistent trading history, good business plans and a thorough understanding of their financial drivers, prices are incredibly low and lenders are keen. However, this also means that start-ups, businesses in a growth phase, or those facing pressure from reduced asset values and/or tightening cash flow will continue to meet a generally non-responsive market for their traditional lending enquiries.
These types of businesses benefit greatly from a better understanding of specialty products and security structuring to increase their attractiveness to lenders.
At the end of the day though, even if you’re in the position to negotiate the best rate in town, banking services are the same as any other product. The cheapest is not necessarily the best and you generally get what you pay for. If a banker is making almost no margin on a loan then they need to write more loans to meet their revenue targets. This means that once a business is on board it’s highly unlikely that a banker who competes purely on price will be able to maintain appropriate contact with a client to ensure proactive reviews and support. It also means that a business will likely be offered the product that is least time consuming for the banker, not what is necessarily best for the business.
This is not to say that price is not important. If you are not already doing so you should review your banking products and pricing yearly. This review should take into account your business and personal goals, planned changes in the coming 12 months, and changes in market conditions and products available.
You need to know what is important to you and what is right for your business. It’s no good getting the lowest price in town only to find out that you’re stuck with an inflexible product that doesn’t suit your business, and a banker who’s too busy to give you the time you need.
Similarly, there’s no point paying a premium for service if all you want is a stand-alone term loan and an advanced online banking system so that you don’t have to talk to anyone.
So… how do you rate your rates?
In 2017 we re-branded to better reflect our services, changing our name from CAV Consulting and Analytical Services to Insight Business Plans & Analysis. This article was originally published under our previous name.