Beware of Banks Bearing Gifts

Recently I have come across many Borrowers who were pleased about the low Interest Rate they are currently paying on their Commercial Property Loans.  Many of them are paying between 6.00% and 6.50% which are historically low rates, actually lower than some current home loan rates .

But these opinions completely contradict the many recent newspaper articles that  have reported claims by many members of the Business Community, of Banks passing on higher lending margins to their Business clients, to subsidise their lower margin Home Loan and Wealth Management Businesses.

So how can we have such a contrast of views from different members of the Business Community? Could it be possible that Banks really are going out of their way to offer cheap Commercial loans? If so what has inspired this benevolence from our Banks?

Generally, Commercial Loans are priced as a Bank Bill Swap Rates (BBSY or BBSW rate ) plus a margin and it is these two components that make up the actual interest rate paid by borrowers  (for simplicity we have assumed that there are no other costs associated with the interest rate charged. In reality, Banks can have many fees and charges, treasury fees, line fees etc, that can impact the actual interest rates/costs associated with a Commercial Loan). Prior to the GFC when competition was at its peak,  it was not uncommon to have clients priced at margins between 1.25% – 1.50% (many clients enjoyed much lower margins).

So taking the 30 day BBSW rate of 3.63%  on the 27th July 2012 (Australian Financial Markets Association) and assuming a borrowing rate of 6.00% per annum, we calculate that this Borrower is being charged a Margin in the vicinity of 2.37%.  From this simple calculation, we  can see that despite borrowers benefiting from what may be perceived as a Low Interest Rate,  the actual margin being charged above the BBSW, is well in excess of the pre GFC averages (by as much as 64% conservatively).  This is a substantial increase in Margin at a time when many Businesses are doing it tough. This increase in Margin has also had the effect of further intensyfying the current economic downturn by removing much of the stimulus that would have been created from a lower interest rate environment. At the same time , it  has ensured that Banks can continue to make record profits by pushing up costs to Business’s disguised behind “Low Interest Rates”.

So whilst many Borrowers may believe they are benefitting from a “Low Interest Rate”, their Banks are actually profiting from much higher Margins, justifying some of the claims of fee gauging by Banks towards their SME clients.

In finance, we refer to this as “Margin Creep” and the Banks have used this process very effectively during the current downturn in both the Home Loan (Retail Banking) and more aggressively with their Business clients. However, Business Clients have borne the brunt of these fee increases as Banks understand how difficult it can be for SME’s to refinance, making them easier targets for rate and fee increases (compared to highly transient, Retail customers who have more competition ,more options and cheaper entry and exit costs).

So next time you find yourself negotiating a Commercial Loan with your Bank, do your homework, review the current BBSW or BBSY rates and ensure the discussion focuses on your lending Margin and NOT your Interest Rate. That way you won’t give your Bank the opportunity to hide an overpriced margin behind a cheap interest rate and your facility will remain competitive over the long-term.

Should you wish to discuss any aspect of this post or any general matter, please contact me on :

Ph: 0388445555



Like in Business, first impressions are very important when applying for Commercial Property Finance.

Many borrowers come to visit me for the first time only after they have unsuccessfully applied for finance on their own. This instantly creates negative sentiment around their proposal as no lenders like to take on business that their competitors have already declined.

Commercial Finance is a complex and highly specialised with many factors influencing a loan approval. For instance, many times we find that clients are trying to negotiate a loan with a Bank that simply doesn’t have the appetite for their proposition despite the strength of their proposal. For instance, during the first few years of the GFC, many borrowers were making applications with the Four Major Banks for Commercial Property Finance and Residential Construction Finance. This was during a time when the Majors were reducing their exposure to these areas and only rationing capital in that space. Many borrowers were not always advised of this and spent months literally queuing up, waiting for a response from their Lenders which in most cases was NO.

There is not always a “one size fits all” solution to your needs. Dealing with Banks, Non Banks, Property Trusts and Private Lenders on a daily basis, most Brokers will have a strong understanding of the level of appetite in the market for your proposition.

It’s vital that you get your application right the first time and that it’s presented in the best possible way. In many cases this will result in having two or more funders, bidding for your business, ensuring that you attain the most efficient and competitive form of Commercial Finance available in the market at that point in time.

Should you wish to discuss any aspect of this post or any matter in general, please contact me or email me on the details below.


Con Katsiouras – Director

Ph: 0388445555   e:

Loyalty from your Bank and Commercial Property Finance – Do they really mix ? .

Banks often talk about a loyal customer relationships, but their definition of loyalty may be very different to yours.

I’m constantly surprised at how many customers fall into the loyalty trap with their banks when trying to attain Commercial Finance.

I’m sure the average Joe Blow would define loyalty as an unfaltering relationship between parties through good times and bad and would think that the core ethos to a strong relationship would be openness and honesty.

But these are very difficult values to hold onto when you have profits on the line, shareholders demanding steady , “higher  returns”, and Bank Managers with “bonuses” dependant on a combination of “profits” and a “strong performing loan books”.  “Higher returns”, “Bonuses”, “Profits” and ‘Strong Performing Loan Books” are all negatively impacted by late or problem loans and this is why your Loyalty may mean very little to your bank should you ever need to call on it.

Consider this :

  1. Bank manages are assigned the difficult task of managing customer relationships, and lending out as much money as they can, in as prudent fashion possible. These managers are trained in lending money but have very little experience in managing a customer during hardship. Actually, managing an average of 80 – 100 customers each, most Bank managers don’t have the time to manage and grow their own books , and attend to their best performing clients, let alone enough time and the resources to manage, advise and assist customers who are experiencing difficulties. In reality, customers who are having trouble meeting their obligations become a real burden to their Bank Managers as they require more time and more resources by way of phone calls, meetings, and extra financial information, updates etc and overall, an extra level over-seeing than most Managers can afford. The best result for the Bank Manager is to have that loan transferred to another department where they specialise in problem loans. From this point on, it becomes someone else’s problem and the they can get on with managing their portfolio and meeting their targets and achieving that bonus.
  1. When loans go sour, Banks are forced to provision for the probability of a loss being incurred against that loan. This provision essentially requires the bank to place capital aside. The economic cost here is that Banks are setting aside capital that could otherwise be used to invest in more loans, investments etc. This impacts a Banks bottom line and it is vital that banks keep their provisioning as low as possible, to increase their return on capital. Obviously once a Bank is forced to allocate capital aside for a problem loan, there is a huge incentive for them to have that loan dealt with in the swiftest possible manner,
  1. Banks main incentive for lending you money is for higher profits and higher returns to their shareholders. This is at the core of every decision they make. As mentioned, bad debts cost the banks money, as bad debts use up resources that could otherwise be used in more profitable areas.
  1. Banks offer the majority of credit on secured terms. When times get tough, banks more often than not, have an exit strategy in place via the liquidation of their security. I have seen friends; family and long term partnerships quickly turn ugly at the first sign of a business slump. So if friends and family “jump ship” at the early signs of difficulty (normally incurring an economic cost in the process) why would a bank stick around, especially when they are able to have their capital returned through the sale of their collateral security?

The more I think about it, the more I believe it is impossible for a bank to really reciprocate loyalty to their customers and work with their clients during real tough times. When taken in the context of a cost vs benefit analysis, it simply doesn’t make economic sense.

When using debt to fund expansion or wealth generation, it is vital that you conduct your own credit risk analysis, just like the bank does and this means looking beyond simply comparing interest rates.

There are ways to structure your debts so that in difficult times, you have more flexibility and greater access to capital when you most need it. The right strategy could be the difference between being able to successfully trade out of a difficult period, or, being held at a stalemate while your bank determines how and when it will liquidate your assets to recoup its money.

At Folio Finance we have a key strategy in place specifically for our business clients. It is the ultimate asset protection strategy and offers the most flexibility , with a key focus on asset protection, whilst at the same time  protecting and maximizing your Credit Score.

In short, the structure focuses on the following key areas:

  1. Hold only your trading/cheque book account with a major bank. They have the largest branch networks in Australia and offer the most flexible access to those accounts when you need them. They also are safe institutions to hold your money with and have the most advanced internet banking systems.
  2. If your business requires an overdraft of <$100k, aim to structure this on an “unsecured basis” where possible, or have it secured by cash only. Sure you may pay a higher rate for the benefit, but it really is crazy to have a small account like this tying up equity in a property.
  3. Have your home loans  structured on a standalone basis away from your business debts. This will almost always entail using a lender outside of where you hold your trading account. There really is no advantage to allowing your home loan/investment loan lender, access to your trading account and this can create all sorts of issues during difficult times ie. when many Australians require access to their equity to fund their operation. If your trading accounts aren’t in great shape, your bank will be reluctant to lend you more capital, regardless of the amount of equity you have in your property.
  4. Hold all your Commercial Property loans with Non Bank Commercial Property Lenders. There are many advantages to having your Commercial Property Loans with Non Bank Lenders. The three main advantages are :

i)                    Banks provide commercial loans on shorter terms, generally 3 – 5 years. At the end of each loan term, customers are required to have their property revalued incurring further costs. Should the valuation come in short (some commercial property valuations have been up to 15% lower this year) then the bank will ask for more security or for more capital to be contributed, in order to reduce your loan back into the bank’s lending parameters. If you aren’t in a position to reduce your loan balance, then you are in default of your lending contract with the bank. This will result in the bank forcing you to refinance, or worst case, taking possession of your property

ii)                   At the end of each year, banks require their Commercial Clients to complete an annual review. These reviews require clients to provide up to date financials each year which are then assessed against the bank’s lending parameters to ensure that you still meet their Lending policy requirements. Regardless of whether you have paid your facility on time, a decrease in your business/companies performance can result in a Default on your loan contract forcing you to refinance your loan even before the loan term has expired.

iii)                 Through the valuation process (i above) or the annual review process (ii above), YOU CAN BE IN DEFAULT OF YOUR LOAN OBLIGATIONS WITHOUT EVER MISSING A REPAYMENT.

iv)                 Non Bank commercial lenders offer flexible interest only terms and offer commercial property loans over longer periods, of up to 25 years with no annual reviews. This factor alone is a huge advantage and one that shouldn’t be overlooked, particularly if you are a Company that experiences lumpy or cyclical cash flow.

v)                  Non bank commercial lenders offer higher lending ratios than the main stream banks. This results in less capital being tied into the actual property freeing up more of your cash for working capital.

Bottom line is that banks are loyal to only one segment of the market and that’s their shareholders. By using multiple lenders, borrowers can diversify their own credit risk, and keep their banks honest.

By following our recommended strategy above, Borrowers’, will experience fewer barriers to accessing their equity meaning you won’t have to approach the bank “cap in hand” at a point in your business cycle, when you are most vulnerable.

Don’t fall into the trap of having all your eggs in one basket, as ultimately you will end up having to work with a bank, during a time when their interests may not necessarily be aligned with your own.

Con Katsiouras – Folio Finance

Ph: 0388445555



I am asked regularly why has it become so difficult to raise finance and why have things changed so drastically ?

When I established Folio Finance 7 years ago, the economy was flush with cheap money and Banks, Commercial Lenders,  Mortgage Trusts and Private lenders in Australia, couldn’t push their funds out the door quick enough. Commercial Finance sector in Australia was going through its own over inflated bubble. This resulted in more money chasing fewer deals, forcing lenders to take on transactions that were high risk with low return. It was an environment where investors and speculators could venture out and secure investments such as Commercial or Residential Property with little and sometimes no equity and the majority of the risk being transferred from the borrowers to the lenders.  Of course, we all know this ended with many investors losing their investments in what were meant to be “secured” investment schemes with the worst impacts still being played in Europe and North America (where having a loan approved was as easy as confirming you had a heart beat). Thankfully, things didn’t get as “wild” here in Australia and the finance sector, supported by a 1 in 100 year mining boom, was able to sustain the impact of the GFC and now has to deal with some of the obstacles the GFC has created, mainly around funding , liquidity, sustainable profits and growth.

I think it’s always been difficult for SME’s to raise finance through our Aussie Banks. Reality is, Aussie banks have always been Asset lenders and never really a true supporter of small companies unless you had Real Property Security. Of course, any banker will deny this and will tell you that repayment capacity comes before security every time. This may be true but loans are rarely approved on Cash Flow alone.

Many factors influence the decisions made by banks. One of the major influences recently has been the greater Government scrutiny post the GFC . This , along with many other factors have worked in unison to create the current environment of tight credit and higher costs.

Rather than try explain them all, ill detail a few of the major issues making it more difficult for SME’s to attain Commercial Property Finance via the main stream banks.

  1. After the GFC, APRA (Australian Prudential Regulation Authority), our prudential regulator of all things Bank, placed larger capital requirements on our banks, stricter lending guidelines, and tighter portfolio controls than pre GFC.  Specifically APRA requested the banks reduce their exposure to Commercial Property. This has created an environment where banks can “cherry pick” the best deals with the best margins without any real incentive to pursue business that doesn’t fit their criteria, simply because their portfolios are already overweight in this segment. Recently, this has resulted in a large percentage of customers being forced to refinance their existing Commercial Property Loans. With all the banks undertaking the similar “clean up” of their commercial property portfolios, many customers have found that they have no other option than to sell their property.
  1. Our banks fund approximately 30% of their capital requirements through deposits. For the remaining 70%, they rely on the global market for “mortgage backed securities”. Unfortunately, the over exuberant lending in America and Europe has tarnished the whole of the global banking industry and anything attached to mortgage backed lending. This has resulted in less money flowing towards this investment. With fewer investors, a higher premium is demanded to compensate for the higher perceived risk resulting in higher rates being passed to customers.
  1. Less Capital means that the banks have to squeeze more margin out of every dollar they have to invest. Because capital is scarce and the banks have genuine concerns about their ability to raise capital in the future, they now are chasing not only the best deals, but the best deals with the highest margins. The lack of real competition in the market,  as  well as the fear and publicity around the GFC and “those greedy Americans and Europeans who ruined it for all of us”, has resulted in the perfect storm for our local banks where they are able to raise rates, increase margin, and blame it all on external events  supposedly “outside of their control”,
  1. THE LACK OF COMPETITION IN OUR MARKET IS THE REAL ISSUE. Real local competition is what keeps rates low and keeps the banks at toe. It’s what makes the banks think twice about increasing rates above and beyond those increases set by the Reserve Bank and keeps them working with clients, even when we aren’t the “perfect” prospect. There were many Commercial Lenders operating in Australia pre GFC and they were doing a great job at offering a real alternative to the banks. Unfortunately, they too relied on the global market to raise capital and were forced to close during the GFC, creating more reliance on the banks and more demand on their capital which provides the perfect environment for banks to continue to increase their profits, simply by charging a higher price for their products, without having to worry about innovation or improving their service proposition.

These are just some of the major issues influencing the local lending market and influencing the lending decisions of the banks. Thankfully, over the past 12 months, a number of Non Bank Commercial Lenders and Private Lenders, have reemerged to take on the banks and provide a variety of options for customers who wish to continue to grow and continue to invest in their future. As these lending institutions don’t have branches and rely on Brokers as their distribution channel,  many of them won’t be known to you.

In the coming posts, we will discuss what some of these new funders have to offer, how their products and service proposition differ from the traditional banks, and some of the key advantages to using these products.

Of course, feel free to leave a comment or ask a question.