Part
Four - Security
It's
stating the obvious, I know, but banks won't lend
in most cases without tangible security. One of
the notable exceptions is if your business is
a franchise (covered more fully in a later chapter).
The
most popular security from the bank's perspective,
and least popular from the business owner's perspective,
is a mortgage over residential property, in most
cases the business owner's own home. With this
security it is not unreasonable for the banks
to set the interest rates on the security they
hold. So you shouldn't be paying any more than
residential rates.
Commercial,
industrial and farm property security would be
the next best choice from the bank's perspective,
but with the increased risk comes the increased
interest rates. The banks will require a registered
valuer's report and generally will only lend up
to 65% of the valuation. If the property is specialised,
banks will only lend up to 50%. Take for example
an investment property, the stronger (perceived
by the bank) and longer a tenant has leased a
property, the better the security is regarded
by the banks and the better the valuation is likely
to be from the valuer.
Mortgage
debentures are not as widely accepted as they
once were, but the banks will still require them
from companies because of the powers it gives
them, namely the ability to appoint a manager
and/or receiver. Having your accountant audit
your stock and debtors for your year-end accounts
could prove beneficial in your request to borrow
against the Mortgage debenture. The cost of the
audit should be ascertained and compared to any
interest rate reduction the bank would provide,
as it does not make sense to action this if it
is not cost effective.
Security
over vehicles, stock and/or plant can also be
provided but is less well received or appreciated
by the banks and they will most likely refer you
to a finance company that specialises in lending
against these types of assets. Their rates are
very competitive if somewhat higher than the bank's
and repayment terms are usually quite a bit shorter
ie maximum term five years.
If
you have provided your bank with more security
than they need, and generally banks will take
as much as they can get hold of, justifying this
by saying it will be in place should you wish
to borrow more in the future, ask yourself whether
they are shading (discounting) the interest rate
you are paying to recognise their lower risk?
I know of at least one bank that does this.
