Effective Strategies to Manage Business Loan Interest Rate Risks

Business Loans: Managing interest rate risks

How can businesses manage interest rate risks when considering business loans?

The information on this website is general in nature and does not take into account your objectives, financial situation, or needs. Consider seeking personal advice from a licensed adviser before acting on any information.

I want the protection in the current low interest rate environment but I don't want to be locked in for too long a period - a commonly heard requirement from business borrowers.

Businesses can often find themselves adversely affected by interest rate changes.

Fixed or variable?

Choosing either a fixed or variable interest rate may not provide the perfect solution for your interest rate needs.

Whilst fixed interest rate borrowers cannot benefit from any interest rate falls, variable interest rate borrowers may find that they are exposed to the risk of rising interest rates.

Successful businesses are continually required to meet increasing demands requiring greater sophistication.

Strategies

Many institutions are able to respond to sensitivities to interest rate movements with customised interest rate risk management strategies to suit your business.

To find the strategy that best fits your requirements you should consider whether, overall, you need the flexibility of a variable interest rate, or the certainty of a fixed interest rate.

There are many innovative interest rate, risk management products in the Australian market designed for the current interest rate environment offering businesses:

flexibility.
the ability to minimise interest rate risk.
interest rate protection with the ability to benefit from lower interest rates.

Larger institutions offer Business Bankers and Risk Management Specialists as part of their service to help identify financial products which may help reduce interest rate risk and uncertainties facing business borrowers.

For example Flexible Maturity Fixed Rate Bills provide a known fixed rate for a total term, say, five years.

The first three year period is fixed plus an optional two year extension period.

Capped Rate Bill

Another example is a variation of the standard Capped Rate Bill, where the customer pays a premium either up-front or in arrears and gives the borrower a known maximum cost of borrowing.

For example if the borrower has a set view on interest rates, or would like to take out some "disaster insurance", the Pay-If-Used Capped Rate Bill provides maximum known interest rate protection from interest rate rises for up to five years - and the business pays for it only if the cap rate is reached.

Think ahead

Try to identify peaks and troughs in cashflows to forecast business needs.

The institution may be able to provide specialised borrowing alternatives in periods where seasonal requirements fluctuate.

A new borrowing strategy may help you to conserve much-needed cash during the post-Christmas period and use credit funds (and not over-draft) to make loan repayments during the month.

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Published: Sunday, 1st Aug 2021
Author: Paige Estritori

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Knowledgebase

Adjustable-Rate Mortgage (ARM):
A type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan.