The cost of funding your business is an important part of the whole recipe. The cost of borrowing money is in the form of funding debtors and stock and that of capital equipment purchases and even business premises. We could consider money and its cost in three categories: primary, secondary and tertiary.

Interest rates could be considered as the primary cost, and as such are often used as a catchphrase in advertising. How often have you seen a car dealer advertise an interest rate of 2.9%, where you have been quoted 8% elsewhere? Clearly the 2.9% is only available to certain stock and has been used to discount the net present value of the purchase price of a car they are having difficulty shifting.

Fees and charges could be considered a secondary cost and are rarely advertised; when they are added to the advertised rate and viewed as a package, the catchphrase suddenly isn’t as attractive.

The tertiary cost could be considered the finance approval conditions such as establishment, mortgage fees and valuation fees, legal costs and ongoing maintenance costs such as monthly or quarterly financial statement updates from your accountant.

With variable interest rate loan facilities, the terms and costs remain open (variable) and are at your lender’s discretion. If the deal seemed so good at the start, you can bet the game of catch-up is likely to start after settlement.

Different finance products usually attract different risk weighted interest rates or margins calculated by financial institutions based upon indices, which may include:

• Security offered or held (mortgages) by the institutions including net worth and profitability of the borrower.

• The financiers perceived loan exposure position to the value of the asset being financed.

• Statistical information relative to, and experience within a certain industry.

• Market penetration through expansion, contraction of a financial institution. They can buy market share for a short period by discounting their interest rate.

• Loan terms and variable or fixed rate lending.

With point one, if your bank holds a mortgage over any of your property, it will help them secure your equipment finance. Unfortunately, this will eat into what may have otherwise been a healthy preserved working capital availability. All banks have “all monies” clauses in their mortgages.

With point two, the erosion of equipment values on the secondhand market has led most financiers to be more cautious by placing the broader industry in a higher credit risk category than they did some years ago. Unfortunately, this is a fact.

With point three, I know there are statisticians at financial institutions, but this information tends to be treated as private.

With point four, all financiers move in and out of different industries. The flavour this year may well be different next year. Your previous “how much do you want” experience may be met with a different response next time.

Point five illustrates the difference in prices between fixed interest rates, which are usually associated with equipment finance, and variable interest rates which are usually associated with property finance. The two are fuel from the same bowser, but are different in what they provide you. For example if your financial institution holds a heap of security, you should obtain a lower interest rate. However, the cost of fees – valuation, mortgage, legal, accounting, establishment and line monitoring etc – are quickly going to eat into that perceived lower interest rate.

Wade Oldham is the director of Wade Oldham Finance

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