Can you bring down the price of your business loan?

16 March 2017

Author: Naomi Gaston
Practice Area: Banking & Finance

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With many companies in Northern Ireland taking a ‘business as usual’ approach to the current uncertain landscape and proceeding with plans for diversification and expansion, Naomi Gaston, Associate in the Banking and Finance team at Carson McDowell explores how to drive down the cost of your business loan. 

It is hard to know where the market is heading at the moment but in recent months I have noticed that many of my clients are seeking additional income streams by expanding into new areas to supplement existing revenues. 

Banks have reported strong levels of lending to business borrowers in Northern Ireland over the last year and this type of lending has remained an attractive option.

Banks measure the cost for finance in various ways, and by understanding the factors at play businesses can take steps to bring down the cost of their loan.

Purpose of the additional cash

The reason a business is seeking additional funding will help determine the rate it can borrow at. For example, if a borrower is seeking to fund an acquisition that will generate future cash and expansion opportunities the rate charged will be different from a speculative real estate purchase. If the loan will enhance the value of the business and is perceived by the bank to be a low risk investment, then the cost of borrowing will be lower. 

Proposed structure of the facilities and security

The type of facilities a business needs will influence the price of lending. For example, term loans will be priced below bridging facilities and revolving credit facilities and unsecured facilities will be priced to reflect the risk profile of the borrower’s market and the overall capital positon of the business. The type of assets being offered as collateral to support the loan will determine the bank’s capital requirements and in turn this will be reflected by the level of return the bank will require.

Credit quality 

The creditworthiness of an individual borrower and the wider borrowing group will be determined by factors including, but not limited to, size, industry, track record and public ratings obtained. Again, a lower risk investment should come with a lower price tag.

Returns

Lenders consider the upfront and ongoing revenue generated by any finance arrangement. Banks look for ways to make money and the loan term will impact on how much revenue and overall profit they will make from a commercial loan. Revenue includes interest paid and fees such as arrangement or utilisation fees and income generated by ancillary facilities such as bonds, credit cards and foreign exchange facilities. 

Comparable deals 

When determining the price of a loan bank lenders will consider recent transactions of a similar size and credit quality in relevant markets to find a suitable comparison rate. This calculation forms part of the internal credit approval process based on commercially sensitive information and the comparison case studies will never be disclosed. 

Geography

Local market characteristics will count in the determination of the pricing of your loan as will the strategic relevance of a particular borrower or financed transaction. 

Competition

Competition is a factor that is playing an increasingly important role in loan pricing as there is a growing number of funders willing to lend. This is leading to competitive pricing in some industries and sub-sectors. 

Northern Ireland banks experience steady competition for business and if you are looking for a loan you may have several offers to consider, particularly if you are operating in the right type of sector with a compelling track record and sound business case. 

The current phenomenon of private equity based funding and the more recent re-entry to lending from indigenous financial institutions will mean that banks may have to alter their market approach. 

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