How your business can capitalise on the low interest rate environment

Overview:

With low interest rates expected to remain a long-term trend, we look at the opportunities available to businesses in the current environment through commercial and asset financing.

Over the course of the past decade, interest rates have been in steady decline across Australia, with the past 18 months representing the most dramatic shift in monetary policy since the Global Financial Crisis in 2008 as Australia’s Reserve Bank seeks to stimulate economic growth.

Since July this year, rates have been at a historic low of 0.25% and according to RBA Governor Philip Lowe it’s likely the current low interest rate environment will remain the norm for much of this decade.

For business owners, the current environment presents some key opportunities, including  investing in new assets or infrastructure to drive growth, leveraging available government support against low interest lending and even restructuring existing debt to deliver more favourable long-term outcomes for your business.

Assessing the current environment

While the majority of public commentary on interest rates focusses on the residential property market, RBA policy also has a significant impact on commercial lending and asset finance.

If we look at the situation prior to COVID-19 as an example, there was a sense of great optimism surrounding commercial lending in Australia with 2020 interest rates kicking off at 0.75%. As a result, it was predicted that 2020 (Knight Frank’s Outlook 2020 Report ) would be a boom year was for commercial property with investment from foreign and domestic sources to reach new highs..

In the realm of business loans and asset finance, rates are at historic lows. The government has attempted to further boost lending over the past six months with a range of measures, including guaranteeing 50 per cent of eligible loans to SMEs issued by participating lenders under the Coronavirus SME Guarantee scheme. The RBA has also issued a term funding facility to help drive down business loan rates.

These measures have been further supported in the recent Federal Budget, which delivered some significant wins for business. These include the loss carry back scheme, which will allows eligible companies to offset losses from 2019-20 to June 2022 against previously taxed profits in or after the 2018-19 financial year and a broadening of the instant asset write-off scheme, among others, as we’ve covered in detail in our 2020-21 Federal Budget Wrap-Up.

How the current low-rate environment can benefit business

Essentially the new government measures are designed to support the low interest rate environment and encourage spending. If your business is in a position to do so, it is worthwhile considering how you can leverage this to your advantage and invest in your business by purchasing assets or infrastructure.

As an example, a business that is eligible for a low-rate $250,000 unsecured loan may consider upgrading a fleet of vehicles to grow or future-proof their operations. In financing this purchase, the business may also be eligible to take advantage of the $150,000 instant asset write-off. Importantly, because of the way the scheme works, if you purchased five vehicles at $50,000 each, you would be able to deduct the full amount for each individual vehicle, even though the total investment is more than $150,000.

With cashflow more important than ever, another option for business could be restructuring existing debt to free up more money and deliver more favourable loan terms. This is particularly important if you have a loan that is now a few years old. Given the significant drop in interest rates we’ve experienced over recent months, there are far more competitive options available.

As Perks Banking & Finance Director, Bruce Debenham points out, while refinancing is a key mechanism business can leverage, it should be carefully considered to ensure it delivers a net benefit.

“Restructuring or consolidating existing debt is something we’re encouraging our clients to look at in the current market, particularly given that low interest rates look set to stay for at least the next three years according to a recent statement from the RBA,” he says.

“If you have existing debt, it’s certainly something to consider but you need to do the sums and shop around to ensure you end up in a better situation than you are presently – for example, you don’t end up paying higher fees that offset any benefit.

“It’s also important to know that most lenders will only consider refinancing your loan if it’s been paid down to around 60-70% of the value of the property or asset. This is where the assistance of an experienced commercial finance broker can be vital to help guide you through the process, decide whether refinancing is suited to your circumstances and provide access to a wide range of loan products based on your needs.”

Restructuring debt into ownership

Another opportunity for business owners is to consider restructuring any lease-to-own or novated vehicle loan arrangements your business currently has in place. By using capital freed up thanks to debt restructuring or tax incentives, you may be able to  choose a borrow to buy arrangement or to purchase an asset outright.

For small to medium businesses, it may be worthwhile considering outright purchase, while for larger businesses, you could use it as an opportunity to take out a mortgage on your place of business with a view to ending rent payments.

Ultimately, no matter which way you go in the low-rate environment, it’s important to only do what’s right for your business. There’s no point simply jumping at incentives or finance just because it’s available and you need to consider the long-term impacts of any decision on your business and your strategic imperatives.

Given the complexity of the current business climate, it also pays to seek the guidance of a professional. An experienced commercial finance broker can be a good first point of call in helping you map out a financing solution that will help you meet your goals, while also helping alleviate the stresses of navigating the lending market.