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Every business is different therefor it is important to take a tailor-made approach that suits your circumstance. The interest rate terms you choose to fix your loan must fit in with your current and future position. To mitigate the risk of cash short falls because of production, pay out and livestock sales, you must review the average rate required to meet your cashflow needs. It is also good to spread risk by ensuring your loans do not come due in the same period.

Fixed versus Floating

The fixed versus floating discussion is continuously raised by our clients. It is important you choose the type of interest rate that suits your business better (tailor-made!). Fixed rates will provide you with greater certainty and stability over the term of the loan. Floating rates are better suited if you are after fluidity and have the capability to handle the fluctuations of the interest rate market. The floating option historically has proven to be a cheaper option. In our experience, some clients choose floating loans for both flexibility and the freedom to change banks without being tied to a lender for a fixed period.

Principal Repayments

Over the past five years, there has been a major shift in the banking sector with a focus on monthly principal repayments with a term loan period of the maximum twenty years. The obvious advantage here is that you are consistently reducing your debt on an annual basis. This is a good policy if your cash flow allows it. You must consider your position carefully as there is little point making monthly principal payments from an account that is permanently in overdraft. By doing this, you’ll be moving debt from a 6.5% fixed rate to a more expensive 9.5% overdraft rate.

Interest Only Loans

As simple as it states, interest only loans mean that you only pay interest on your loans and make no debt reduction payments.

Lump Sum Payments

With lump sum payments, you can set your loan to an interest only basis and when cash flow is good you can make principal repayments, thereby reducing your debt. To make lump sum payments work for you, you need to have already thought about your interest rate strategy so that you can make these repayments without breaking a fixed term agreement which may possibly incur break costs.

Wholesale Term Loans

Some banks offer certain clients 30, 60 and 90-day money, known as wholesale term loans. These are very transparent. The bank will usually notify you of the roll over period, as well as advising you of the base rate and margin. On the surface, there is some rounding that applies here. This can of course be discussed with your banker. You may also have the benefit of one of the financial markets team to assist you, plus you’ll have access to an array of other available financial products. Many of these products are only available to selected clients according to scale and financial acumen.

All In One Loans

All-in-one-loans relate to one loan agreement which has several different fixed term time buckets. This allows you both flexibility and security. Most of the banks are offering these loan products and they are sold as options with minimal banking fees. In some cases, all in one loans are not as transparent with the margin as other products.

How CMK Chartered Accountants can help

With the information we’ve shared relating to interest rates, you should be in a stronger position to make the right financial decisions around your interest rate strategy. If you have any doubt or wish to discuss any aspect of establishing an interest rate strategy, talk to us. Be aware for budgeting purposes, simply dividing your loan by twenty years, and introducing it to projected income statements is not quite correct. You need to enter the loan amount into a mortgage calculator to obtain the correct amortisation rates. As a leading accountancy practice, we are actively involved with clients and their bank managers; often assisting with loan structure and consulting with them so that they can benefit from our knowledge of current market interest rates.

If this is something you would like us to help you with or you have any other questions regarding interest rate strategies, please contact CMK for a no obligation chat. You can visit us at www.cmk.co.nz.