Some Insight on Interest Rates

Most people view commercial interest rates from the perspective of their home loan rate. A logical beginning, but perhaps not very accurate.

Firstly, funds used for home loans are derived predominantly from your hard earned cash deposits, and the interest rate usually moves closely with the RBA Cash Rate.

Funds for business lending come from both bank deposits and about 60% from the Wholesale Money Market. This results in business interest rates not always moving in line with the RBA, but rather with the market.

FACTORS THAT IMPACT BUSINESS INTEREST RATES

Commercial equipment finance rates are also determined by many other factors
In summary;
• Type of security offered on the loan
• The $ size of the loan,
• Term of loan (in equipment finance longest term is 5 years)
• Assessment criteria (has the loan been assessed on a “full” or “low” doc basis.

RULE OF THUMB – Bricks and Mortar

Home loans attract the best rates because they are normally for larger amounts and longer terms, but more specifically, they are secured by bricks and mortar. Likewise, when a bank uses a commercial property to secure a loan, you can negotiate a better rate.

RULE OF THUMB – the more you borrow, the lower the rate you pay

As a rule of thumb, equipment finance rates will drop the larger the dollar amount being financed. Any transaction where the amount financed is under $20,000 (and then under $15,000 & so on) will attract a premium. Likewise, anything over $50,000, then over $100,000 and so on, will see the rate drop.

What is your equipment? Does the lender like it?

Next, the type of Equipment/Asset being financed has a bearing on the rate. Equipment is categorised in the following way where Primary assets attract lower rates flowing through to Tertiary assets, with higher rates.

As a general rule, the more specialised or higher depreciating the asset, the higher the interest rate applied:
• Primary assets include New cars, trucks, and yellow good (tractors, farming equipment)
• Secondary Assets: Lathes, Heavy Machinery
• Tertiary assets: Computers, Printers, Software

RULE OF THUMB – the shorter the term, the higher the rate

 The term of the loan also impacts the rate you pay. Generally, the longer the term the loan runs over, the lower the rate. Why is that? From the lenders perspective there are fixed costs to setting up and maintaining any size loan. The longer a loan runs, the more interest you pay, and therefore the more income for the lender. To recoup set up costs, the lender will set the rate to ensure a minimum return which usually means a higher rate for loans that run over 1 or 2 years.

RULE OF THUMB – “the more pain, the more gain”

Lastly, the approval assessment criteria, also determines the rate. This area is a bit more complex and will be covered in another article however in brief: the more information provided to the lender (such as financials statements), the better the rate we can negotiate.
This is where the saying “the more pain, the more gain” could be applied. In some instances, the additional pain of full assessment loans is not worth it and the actual $ difference can be made up for in the time you save by not going through the full assessment process.