It’s not just about the price!

Corporate finance is very different from consumer finance, which in itself is not always what it seems to be, and unfortunately, consumers tend to forget that banks are also businesses, and they are very good at addressing what the public likes to hear, which in most cases is a low interest rate.

What they don’t know is that with interest rates, there are a lot of additional costs that, when included in the equation, increase the total cost of the loan, which doesn’t make that initial rate quite as attractive after all.

Let me give you an example that price is not the only thing to consider. Let’s say you need an 850K business loan and the bank has 2 options available:

  1. Commercial Invoice – 0.5% Registration, 4.90% Interest, 2.75% Line Fee $175 30 Days 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 in the future.

If you look at the interest rates advertised by most banks, you’ll see the * sign next to the advertised number, which means you can get a better or worse interest rate depending on the risk to make sure you get the better interest rate you need to prove strong security. Cash flows, proven history, ensure that you have systems in place, as these all help to portray your business in a stronger light, which in turn reduces risk, and once the risk is reduced, the better you are likely to be.

Many companies are now in a stronger financial position than they did at the beginning, but they still pay the same interest rate, and it is also likely that, depending on the time factor, they will have much more equity in the property that secures their facility, which can cost the business unnecessary costs and also limit the possibility of future loans.

If you have never reviewed your loan before and are still in the same deal, I would strongly recommend that you talk to your broker as there is a very high probability that you can get a much better deal.

When checking your loans, here are 5 things to consider:

  1. When was the last time you renegotiated? – Once you have 2 solid years with good corporate finances, it’s time to talk, the best time to set up finances is when you’re doing well.
  2. Release some equity – When you took out the original loan, the bank may have taken all your assets as collateral, while the situation can now be very different and by reviewing your current loans, it is possible that we can release some of your equity, which in turn allows you to make future investments.
  3. Tax Effectiveness – Make sure your personal debt is separate from business/investment debt, pay off the personal debt first, as there are no tax deductions on personal debt.
  4. Lead things past your accountant for structure and taxes – Again, make sure the new structure is tax-effective for you, so talk to your accountant and get advice. I always insist that my client check if the new structure works for their personal situation.
  5. Consider repair – Consider repairing a facility or part of a facility, as this can add security to your cash flow in the future, as you won’t be exposed to up and down rates movements, but read the fine print if you plan to pay off debt in the near future and leave at least a subvariable so you can pay it off without penalties.

So basically don’t just look at the rate, take the time to understand the difference to the loans offered and get your broker to tell you the total cost and most importantly… the savings!

To give you a good example, I have just completed a simple refinancing and restructuring for one of my clients, who is a contracted civil engineer and real estate investor with a large portfolio of commercial and residential properties. The interest savings were only 0.6% on what he was paying, but we structured all his loansm, took the savings we had created and deposited them in his home loan (non-tax deductible) This simple change erased 5.7 years of the home loan along with a saving of $141,305 in interest payments without changing its current payments.

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