The press has been full of interest rate news in the past few months, on the back of the reserve bank reducing the cash rate.
It is no wonder this has made headlines, as we are in uncharted territory, and rates are at record lows.
With the season looking problematical for a fair portion of the state, a close, hard look at finance costs is warranted. In lots of cases, the cost of finance sits within the top three biggest cost items.
While the cash rate is at 0.75 per cent, this is much lower than the rate businesses borrow at. In past articles I have written about how loans are priced. I won't revisit that conversation, except in the context of the different components that make up the overall interest rate.
If you are right on top of the game, a rate that starts with a two is not out of the question.
At the moment I am seeing plenty of agribusiness loans in the mid-3pc range. Historically, they have never been lower.
If you are right on top of the game, a rate that starts with a two is not out of the question. This is nowhere near the norm, and there are quite a few hurdles to jump to achieve this type of rate.
Whichever way you look at it, there are material savings to be had. Being organised with your information to the bank is a must. Providing financial information on time makes the bank's job easier to get the deals approved and shows the professionalism of the agribusiness in question.
It is important to understand the various components that make up the total interest rate. For an overdraft type of product, it is pretty straightforward to calculate. You need to ensure you include the fees and charges to work out the overall rate.
Banks vary in how they charge fees on overdraft products. Some have no fees - although this is very rare - while others have a monthly fee. It is not uncommon to have line fees on an overdraft - these are charged monthly or quarterly, and are based on the limit, not the balance. It is essentially a fixed charge you pay regardless of how much of your limit you use.
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This is why it is important to either negotiate a lower line fee or have an overdraft limit that is appropriate for your cash flow cycle.
The size of most business loans is normally much higher than the overdraft. It's important to understand what makes up the various parts of the business loan as well.
The choice of funding source will determine the makeup of the business loan. It is common for business loans to be have three components: base interest rate, the bank's cost of doing business and customer margin.
Most of these bank bill type products roll over quarterly. Each time, you can get a breakdown of the various components, and compare them to the last time the loan rolled over.
The customer margin may also be rolled into a line fee, which is normally charged on the limit of the loan, and not on the balance. While the loan is fully drawn it is not an issue, but a quick calculation can be done if you start paying off principle, and don't reduce the limit. This way an agribusiness can determine if it has the most appropriate funding mix.
- Details: bagshawagriconsulting.com.au
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