How to Negotiate a Better Interest Rate for Commercial Property Loans

For many borrowers the central focus of initial discussions with banks and finance companies is the interest rate being charged on potential borrowings. Despite advertising some rates on websites and via newspaper advertisements, many bankers are loathe to offer an upfront quote on business and commercial borrowings.

The reason for this is “Risk”. For a business or commercial borrower the interest rate charged is determined by a number of factors which are captured within an all encompassing statement on a letter of offer.

Your Interest Rate is BBSY (The Bank Bill Swap Rate) plus a margin of x.xx%.For example it may be that the BBSY Rate is 4.85% today and the margin you are being charged is 2.15%

This means that your loan will cost you an all up interest rate of 7.00%. The key to negotiating a better rate for business and commercial borrowings is to understand how Risk Margins are calculated. The Risk Margin quoted is derived from the banks own assessment of both the borrower and the property they are financing.

Factors that can influence the margin are:

The property itself:
  • Is the property in a well sought after area?
  • Is the property specialised – meaning that only certain buyers or tenants would want the property?
The strength of the borrower
  • Do you have other income in addition to the property?
  • Do you have other assets in addition to the property being purchased?
The strength of the tenant
  • Is the tenant an existing long term tenant with a good payment history?
  • If it is a new tenant, are they are large or small business and what is their capacity for payment?
The strength of the lease
  • Is it a short term (2 Years or under) or longer term lease (3 x 3 x 3)?
  • Who has prepared the lease – you or your agent / lawyer?
The management of the property
  • Have you employed a professional property management team?

Risk Margins and hence interest rates are determined by the bank based on these factors as well as other conditions they may put on the loan.For example, they may ask you to maintain an Interest Covenant of 1.5 times interest cover.

This means that for every $1 of interest you are being charged, you will need $1.50 of Net income from all sources. You might also be asked to produce quarterly or half yearly financial statements and to agree to have the property you are buying re-valued every 2 years.

When negotiating on interest rates, don’t just expect a bank to reduce their interest rate simply because another financier is quoting a lesser number.

In order to properly negotiate, you need to create a well structured proposal to obtain the loan. This proposal should include not just your ability to repay the loan, but a thorough explanation of why this loan is a lower risk than other loans to the bank. Only then will you achieve the best possible interest rate for your borrowings.




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