INTEREST RATE SOLUTIONS FOR BUSINESSES In association with AIB

Ann Murtagh, Business Strategist, AIB

Much media coverage has been given to the topic of rising interest rates. While the majority of this coverage has focused on the impact on homeowners, a subject that has been largely ignored is the impact on business owners. Ann Murtagh reports.

Since December 2005 interest rates have increased on eight occasions, bringing the ECB rate from 2% to 4%. While the rate of 4% is still relatively low, the rises have increased the cost of credit to business owners and have increased their interest bill. With further increases predicted over the next 12 months, you need to consider now how you can minimise the impact of the rises on your business and even try to reduce your interest bill.

ALTERNATIVE SOURCES OF FINANCE

Assess alternative sources of finance that are available to you that will help reduce your need for bank finance and hence your interest repayments. Finance could come from friends, family or venture capitalists who may be willing to invest in your business. Venture capitalists generally do not look for repayment, thus freeing up cashflow, but they often request an equity stake in the business.

Enterprise Ireland and County and City Enterprise Boards provide grants and financial support for the start-up and expansion of small businesses. About one third of the aid provided by CEBs is repayable, but it is usually on very generous terms with zero or low interest or dividends, 12 month moratoriums and with four to five year repayment or redemption terms commonly available.

The cheapest funds you can find are within your own business. If you can collect money due from your debtors quicker, negotiate longer credit or an increased credit limit with your suppliers, or reduce your average stocking levels in proportion to sales, you will have to borrow less money to fund working capital. You will therefore save on the cost of bank interest, or alternatively, you will have additional ‘free’ money to support additional sales growth.

REDUCED INTEREST PAYMENTS

If you do avail of bank finance, which comes in various forms from short term or working capital finance to facilitate day-to-day operations to longer term finance for fixed assets, there are ways to help reduce your business’s annual interest bill: Y Use specific financial products instead of the business overdraft to spread large one off annual costs over the year. It will save you money and help your businesses cashflow. For example, you can save around €300p. a. on finance of €10,000 by using a structured lending product instead of your overdraft.

» Match the term of your loan to the life of the asset.

» For longer term projects where certainty is required and in a rising interest rate environment it is worth considering fixed rate lending.

» Ensure that your account operates within its authorised overdraft limit. If, due to unforeseen circumstances, your current limit is not sufficient, discuss an increase with your Branch in advance of requiring the funds. This eliminates surcharge interest, and saves a ‘referral’ administrative charge levied if your account operates in excess of its authorised limit.

» The more of your business you give your bank, the easier it is for the lender to price your ‘package’ rather than price by item.

» Planning ahead is vital at every stage of your business. When cash rich put your money in a high interest bearing deposit account. When cash short be sure to have ready access to finance.

» The key to getting the best out of your bank is to take an active role in establishing a good relationship with your bank. Talk to your bank manager regularly and discuss with them how you can reduce your interest bill.

MANAGE YOUR Interest BILLS

Business costs are often cited as the number one concern for business customers. By following the steps outlined above, you can manage and potentially reduce your annual interest bill – even in a rising interest rate environment!

Published in the July/August 2007 Issue of Irish Entrepreneur