Interest Rates Collapse:  Are you getting the benefit?

We live in interesting times.  Who would have forecast in June 2008 that the 12 month bank bill rate (then at 8.00%) would be 3.17% 6 months later?  Yes, the drop in bill rates is greater than the cuts announced by the Reserve Bank.  Efforts to provide liquidity to lenders certainly appear to be having an effect.  The issue now is, how can you fully take advantage of these dramatic falls?

Some banks are increasing lending margins.

Some clients have been reporting that their bank has passed on most of the Reserve Bank interest rate cuts, but increased their lending margin, leaving them little or no better off.  The page one headline of The Financial Review on 13th January 2009 stated “Risk Averse Banks Raise Loan Rates”.  So what can you do to make sure the full benefit of falling interest rates flow through to you?  They key is to switch the pressure back onto the banks by applying competitive pressure.

Revise your business plan and budgets and get a range of quotes.

There is almost always a great pay off from preparing a professional business plan and current budgets and seeking quotes from several lenders.  Lenders need confidence in their clients if they are to offer their best rates and lowest lending margin.  To gain that confidence, farmers must provide a lender with a coherent business plan, demonstrating the strengths of their business, together with budgets supported by work sheets that demonstrate how farm income and key costs have been calculated.  Banks are telling me that in the current environment “all the boxes need to be ticked”.  If you go to the bank without a professional business plan you will likely pay the heavy price of being charged higher interest rates.

In one recent case after we prepared a business plan and budgets, a client got competitive quotes.  Existing loans that currently are at interest rates varying between 13% and 9.5% will now be consolidated into a single line of credit facility at 6.4% with a new lender.  Importantly, the cost of establishing the new loan was a little under $1,000.  The savings to his farm business are very great, and it now has a secure line of credit including a risk management reserve if needed.  As further interest rate cuts flow through, the farm business will benefit further.

How great are the savings you might achieve by seeking competitive quotes?

In the case just mentioned, the reduction in interest rate is around 3.5%.  Other clients are achieving savings of 1% to 3%.  So if you have loans of $500,000 which are replaced by a new facility which is 2% cheaper, the saving is $10,000 pa.

You can estimate the potential annual saving in finance costs based on your total debt by referring to the table below.

Which lenders are quoting the lowest rates?

Phone me to discuss.  I’d be happy to tell you my experiences – could save you some dollars!  Phone me on 0408 296 195.

Prepare a Business Plan and Lending Application without cost.

Apply for the Professional Advice and Planning Grant (before 31st March 2009).  The grant monies will fund the cost of a professional prepared business plan and lending application.