Interest rate management

Anyone that borrows money is experiencing variable rate increases as the RBA attempts to manage inflation.  After a couple of years of roughly 3% interest rates, now we have closer to 7%.

7% should be manageable but there has been a lot of debt taken on in the last few years to expand farming and whilst seasons and commodity prices have been generally favourable for the last 3 years the damage to the P&L from increased rates is now appearing. 

For our business costs, it is generally difficult to make enough saving on any one item to have a meaningful impact on our overall expenses.  Hence we are left with trying to make small savings across as many items as we can in order to keep overall expenses in check.  Inflation/opportunistic price increases are making this harder and harder.

The banks are still looking to reward the best performing borrowers.  For new borrowers this is relatively straightforward as they get the best pricing that is available in the market to encourage them to move banks.

For existing customers, you have to ask to get a better deal than you are already getting.  Banks, like all businesses, charge whatever they can get away with. 

Making sure you are getting the best deal possible for your business does not need to ruin your relationship with your bank.  You should however be presenting yourself in the best possible light and be prepared to consider alternative banking arrangements.  The thought of changing banks with  the associated hassle of new accounts, new internet banking etc puts many borrowers off this journey. Consider this though - if you are borrowing $5mio, each 0.1% change in your interest rate = $5,000 per annum.

So, is it worth checking if you can get a 0.25% or $12,500p.a reduction in your interest rate and stay banking where you are?  Of course it is!  Go to the beach to celebrate!

One other way to make sure you are getting the best out of your banking arrangements is to not let the overdraft go far into credit.  Most banks (not all) have separate overdraft loans and Variable rate ‘term’ loans and you need to move funds between loans to pay the least interest.  With harvest proceeds recently hitting your overdraft and hopefully moving into a credit position,  if you leave $1.0mio sitting in credit for one month, you are costing yourself around $6,000 in interest each month by not transferring it to reduce your variable ‘term’ loan.  In reality, the O/D should sit as close to $0 as possible all year – this takes some management.

All the newspapers etc are suggesting variable rates will continue to rise for a few more months.  With inflation about to be impacted by wages growth we can expect interest rates increases to continue and remain there for a couple of years.  Fixed rates aren’t offering any relief yet but are worth considering if your view is that rates will continue to rise.

ACTION

1.       Prepare yourself for your annual bank review – this is as good a time as any to seek a reduction to your borrowing costs.

2.       If you have a view on interest rates, watch the fixed rates on offer for opportunities to manage your exposure to variable rates

3.       Whilst we all like to have good business relationships, put your hard hat on from time to time when dealing with your suppliers/service providers.  Managing costs has always been and always will be important in agriculture, despite our obsession with productivity.

Hamish White is an independent farm business consultant specialising in banking and insurance based near Wagga Wagga.

Contact him about getting value from your insurers and bankers.

0427 833 049

hamish@hwconsulting.com.au