Need reminding to lodge your monthly or quarterly BAS on time?

Then join the AFYF mailing list and receive ongoing information, news and updates on the latest tax, business, marketing and accounting developments. We’ll even remind you to lodge your BAS on time!

Out Sourcery

  • Bookkeeping
  • MYOB Setup and Training
  • Business Systems and Management

MYOB | Professional Partner learn more »
 

Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Reducing the pain of interest rate rises

In the July issue of My Business, banker Graham Fryer outlines the steps that can be taken to counter the negative effect of rising interest rates on business.

The simplest way to mitigate exposure to interest rates is to fix the loan for between one and 10 years, which provides certainty but restricts ability to make additional payments or switch lenders. And should official rates fall, there is a commitment to the higher rate until the end of the term.

An approach that’s becoming increasingly popular is splitting the loan into two or more variable and fixed components, allowing a bet each way on interest rates.

Lenders also offer more sophisticated interest rate risk management tools, such as caps (upper bound for the interest rate) and collars (an upper and lower bound) which have been used effectively by corporations. Small and medium businesses, however, have been reluctant to use caps and collars, due to the complex nature of the options and nervousness over fees or margins.

Another option is hedging bets on a 3+3 year rate. That is, fixing the loan for a further three years at the same rate, if interest rates have risen, or alternatively switching to the prevailing variable rate or new fixed rate if interest rates have fallen.

This addresses the gap, bringing a practical interest rate solution to the smaller end of town, says Graham.

Source: My Business e-news, 28th July 2008

 


« Back