Part 2: Remain in Control of your Destiny
LAST WEEK, we made a start on understanding the pros and cons of Bank bills. But you also have other options.
Non-bill facilities are available through the big four banks, but are generally priced in a way as to only be competitive at smaller loan amounts.
While the big four banks are generally able to price better than smaller lenders, there are other factors considered to be important than merely the cost. And for small business, the interest rate on their borrowing is a relatively small consideration, in the overall scheme of things.
Far more important is access to credit, and flexibility of being able to draw up and down on that credit. Because, having this ability will reduce your overall interest costs in the longer run.
Proper Structuring is so Important
Over the years, I have often seen the results of the incorrect structuring upon a business, and it is certainly not pretty.
For passive investors in Commercial property, your ability to draw up and down is typically not of such importance — as you are typically looking to lock in an income from the rent from a property; and surety of cash flow is far more important.
As such, the bill facilities may be a more attractive option in this case — particularly, given the possibility of more complex interest rate hedging products, which we can explore another time.
For Commercial property investors looking at taking out a bill facility, consideration should be given to the loan term; and whether or not the facility includes a requirement for annual reviews.
The latter requirement has been a downfall of many businesses over the past four years — because one bad year, may trigger a change in loan terms. Things like a demand for debt to be reduced, or cleared in full; or an increase to rate. And non-compliance with terms can result in loans moving into default.
Bottom Line: Bill facilities can be useful for the right borrowers.
However, care must be taken with regards to the terms of the bill facility. And consideration should be given to loan flexibility and covenants placed on the facility by the lending bank (eg: the requirement of annual reviews) in addition to rates and fees.
Even though your interest rate is important, there are many factors you need to take into account when borrowing for business or Commercial property investment.
Being stuck in an inappropriate facility may hold back your business or property investing. And this will cost you considerably more in the long run, than a few basis points on your initial interest rate.