For most business owners, the focal point of a loan offer is on the all-important margin. While this is a key ingredient, I consider it to be just one of the many key points that make up a truly great loan offer provided by a financial institution.
In my mind, the length of the loan, the conditions imposed, the reporting requirements and the covenants, are as important as the interest rate and upfront establishment fee.
Have you ever considered the cost in time in completing reporting requirements for a bank? These can often become onerous, and even expensive by the time you seek input from your accountant, book-keeper or CFO. It begs the questions: what value do you place on your time? And can you afford to take this time away from your business?
The fact is, often this ‘time cost’ can be greater than the benefits achieved negotiating a lower interest rate. But it is essential that loan terms and conditions are thoroughly reviewed before you sign facility agreements or letters of offer. The right terms can ultimately save you thousands of dollars in time, accounting and book-keeping costs.
The key to an effective review is to have the terms, conditions and covenants explained to you in detail by someone knowledgeable in these things, whether the bank or an independent party. Don’t allow these to be simply ‘brushed over’ just because the rate appears right. Once the finer points are in order, they will serve you well for the duration of the loan. You won’t have to spend any more time and money continuing to monitor your facility.
Navigating through a facility offer and interpretation of the conditions can be a minefield on a good day, aside from any understanding that the bank’s interpretation of a condition could be different from your own.
For example: did you know that even though it may not be spelt out in your actual letter of offer, the banks may revalue your venue – at your expense – if they deem there has been a deterioration in the risk profile? This is often hidden in the terms and conditions, which most people don’t read.
It is therefore important that you understand how banks view your pub and its risk profile when negotiating conditions.
We suggest getting answers to the following questions:
- How often must you provide financial information to the lender?
- What is the loan-to-valuation ratio (LVR)?
- What are the serviceability covenants, and what are these are based upon?
- How does the bank monitor the value of your pub?
- What happens should the value deteriorate?
In conclusion, we think that sometimes going with the lowest rate can cost you more in the long run. And conversely, navigating through the offer with someone experienced can save you.
Article supplied by Rob Gleeson, Principal, Hospitality Advisory
Mortgages & Co
Mortgages & Co is a modern debt advisory firm focused on clients and the services they want delivered, stemming from decades of accumulated experience in financial services.
The principles’ knowledge of banking and finance industries aim to ensure mortgagees get objective views, the right advice and the product that suits their situation.
Everybody, every business, every time.
Mortgages & Co P/L, credit representative 481603, authorised under Australian Credit Licence 389328.