You may have realised on your search for a business loan, that the costs vary significantly between lenders. The interest rates, upfront fees and ongoing fees do vary, as lenders price their products based onyour businesses risk profile.
What is a risk profile?
A risk profile is an assignment made by the lender in determining the risk associated with lending to your business.
What affects your risk profile?
Length of ABN Registration
A newly established ABN is considered a new venture/start-up business by a lender unless there has been a recent change to your business structure. They may attract higher interest rates compared to more established businesses. The more traditional lenders tend not to play in start up business lending, unless you have strong history with the lender. More Specialised lenders have appetite in this space. but they tend to offer higher interest rates.
Conversely, more established businesses with strong business performance and cash flow generally have access to better loan products.
Your business performance (or expected performance) is a key metric which determines the loan product of a lender. If your business is generating strong revenue, good free cash flow and meeting its debt commitments; then lenders would consider this a lower risk profile. Consequently, a lower interest rate.
GST registration is not a lead indicator of interest rate, but it does provide a lender with one significant metric of your business: it’s turnover. Registration is not required if your business turnover is less than $75,000.00 per annum.
A business with this turnover is less likely to show sufficient profits to service a higher level of debt. Generally, a business would have expenses of 30-40%, which must be deducted from the revenue. Lenders often limit the borrowings to businesses who are not GST registered, restricted by affordability.
Secured versus Unsecured
A secured loan offers the lender an asset as security. This could be a vehicle, machinery or property. An unsecured loan is a higher risk to lenders.
Secured loan rates also vary. For example, newer assets tend to attract lower interest rates than older assets. An assets age is important in profiling risk. If a lender must recover the asset due to default on the loan, newer assets tend to retain value.
Read more on our secured vs unsecured in our recent blog.
Low Doc vs Full Income Verification
A Low doc loan can attract higher interest rates, given evidence of income is not provided. The lenders assessment is based on the strength of the asset being purchased and the equity/deposit. The business financial performance isn’t a consideration on a low doc loan however further checks are conducted – for example, satisfactory credit checks on the business and Directors, and credit references are conducted with lenders on current or past loans.
The business asset you are purchasing can impact the interest rate. Newer assets are considered lower risk to a lender, than older assets. And motor vehicles, trucks and wheeled equipment are more attractive than other assets, such as hospitality equipment (think, ovens, commercial kitchen bench tops).
Contributing a deposit to the purchase can help reduce the lenders risk. Equity based risk is assessed in Loan-to-Value (LVR) ratios i.e. the loan value to the assets value. The lower the LVR, the lower the risk, the lower the interest rate.
If your Broker or Lender offers you a higher interest rate on your business, understand why the rate is high. Interest rates are risk based.
Don’t be afraid to ask the right questions!
Is it a Low Doc loan, or because your ABN registration is less than 2 years or your not GST registered? Or perhaps the age of the asset is impacting it? it is important to understand the reason, so you can address the risk. For example, you may wait to purchase the asset until your business is more established. or you may choose to buy a newer asset. Your Broker or Lender should discuss the options with you, ensuring the best outcome for you and your business.
The cost of a business loan can vary with individual business circumstances. Your decision to opt for a business loan should be considered in conjunction with the expected return from the asset, under advice from your accountant.
The team at Yes approved will guide you through the tangled web of business lending. With our forthright approach you won’t be left in the dark. Contact our Team today
The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.
Any advice contained in this document has been prepared without taking into account your particular objectives, financial situation or needs. For that reason, before acting on the advice, you should consider the appropriateness of the advice having regard to your own objectives, financial situation and needs.