07 Jun It’s time to check your Interest Rate

By Ian Robinson

The incessant raising of interest rates is impactful and meaningful on all measurable accounts.  Whilst contractionary decision making has been focused on the mechanics of operational cost management within businesses, it is a reasonable deduction that little attention to date has been applied to funding structures and the cost of capital borrowed.

Debt capital is relatively inelastic in demand over the short (to medium) term which means the providers of capital have the capacity (and willingness) to pass any cost increases onto the borrower with minimal impact to the demand of this capital.

Why is this so?  It is because the capital deployed by the borrower has been reinvested into illiquid assets or enterprise activity that cannot be easily unwound, and if done so irrationally, could result in significant capital loss by the borrower.  Hence the borrower is required to carry the burden of all cost pressures implicit within the value of money.

Just because the borrower may not be able to unwind a debt facility in the near term, it does not mean that the borrower cannot renegotiate the terms and price of money with the debt provider in the interim.

But unsupported threats declaring the act of refinance if rates are not lowered is a most counterproductive and self-destructive strategy.  It demonstrates unprofessional sub satisfactory character to the point that it ultimately redirects time poor bank manager’s resources in alternative and more positive directions and the residual outcome is a fractured relationship.

So how is successful negotiation achieved?

Good will developed between borrower and banker is a currency that pays for a ticket at the table to negotiate on terms that are meaningful and productive for both parties.  A bank’s provision of capital is weighted on the risk profile of the capital deployed.  Presenting a refreshed data pack that is accurate, timely, relevant for credit purposes is the first key.  The second key is depth and quality of information presented.  Both done well can materially improve the credit risk rating of the borrower and hence gives the lender the capacity to reduce interest rates without impacting the lender’s Return on Assets (or profitability in the language of private enterprise).

All representations need to be backed by source documents.  It is an information driven process.  Also, understanding the drivers of credit and making long term decisions within the business model to ensure that your business model fits within the realm of the bullseye.  The further you move your business towards the outer ring of the dart board, the more resistance and negative sentiment you will receive for all your efforts.

Remember, in a general sense, equity takes risk, debt does not.