With the seemingly daily talk about interest rates and what will the RBA do next, we automatically think of the impact on home loans. At least that is how it is presented to us in the media or discussed around the water cooler in a workplace.
Commercial loans have seen rates increase by more than the average home loan over the past 18 months. This means significant pain for those businesses with existing loans, and headaches for those businesses looking to expand and take on new business debt.
Commercial and business loan rates are generally 2%+ more than the average home loan/mortgage, given they come with more inherent risk to your bank, as a business is viewed as riskier than the housing market.
At Carbon Finance & Lending, we have put together these 4 steps to take to ensure your business can thrive despite interest rates remaining at their highest level in over 10 years.
Step 1: Refinance Your Current Debt Structure
Refinancing your current debt structure is only applicable if you already have a business/commercial loan in place. There are still competitive rates to be found but only if you know where to look. Your options are not limited to just banks, with other types of lenders and financial institutions offering great products that are not widely advertised. If you have multiple debts with different lenders, our Carbon Finance and Lending team of brokers can assess your options to consolidate your debt to streamline your repayments and give you breathing space, and even a discount on your current interest rate to improve your cashflow.
Step 2: Explore Debtor Financing Options
In the current economic environment, your business might be profitable with strong sales, yet your cash flow is still an issue. Whilst some small businesses are thriving in the post-COVID-19 landscape, others are struggling to pay their invoices on time which means you may find your debtors are pushing payment terms out and your cash in the bank is starting to get below where you feel comfortable. One option your finance broker could explore for you is debtor/invoice financing, whereby a bank will lend you cash of up to 85% of a sales invoice you have raised. There is a misconception that only struggling businesses take up this option, however, we have seen many viable businesses use debtor/invoice financing to great effect, especially if their operations are seasonal or volatile in nature.
Step 3: Financing Larger Purchases Instead Of Using Cash
Whether your business is looking to buy some vehicles or purchasing a new commercial premises, even if you have the cash available, financing can sometimes be the best option depending on your circumstances.
You may still need to come up with some of the cash, as most banks will only lend up to 60-70% of the value of a commercial building, however for assets like a work ute or van, you will generally be able to borrow the full purchase price.
Not only will financing be beneficial to cash flow, but as long as the asset purchased is for business purposes, the interest on the loan may be tax deductible, which reduces your tax bill.
Step 4: Deciding Between Secured And Unsecured Lending
Many business owners are unaware that there are different categories of general business lending, being secured and unsecured.
Secured loans are safer from the bank’s perspective, and therefore they charge lower interest rates. A secured loan means the bank takes a mortgage over an asset so that if your business goes bust, the bank will automatically take possession of that asset.
Unsecured loans means the business provides no form of asset security, therefore the interest rate is higher as the bank is assuming more risk.
Some business owners have no choice but to opt for an unsecured loan and take the burden of expensive interest rates, however your finance broker should review your circumstances periodically to see if you can convert your unsecured loan to a secured loan, or consolidate your debt (see steps 1 and 2).
Get Tailored Advice From A Finance Broker
Commercial and business lending is vital for many small businesses to thrive, and Carbon Group has helped hundreds of our clients get access to funds to help them do what they do best. Contact our Carbon Finance & Lending team for a free chat to discuss your circumstances, and help take cash flow stress away.