In his weekly business banking post our CFO Greg Taylor explains a few terms to help you to be on top of any meeting with your business banker.
Ever feel uncomfortable when you meet with your business banker because they use fancy terms rather than speaking your language?
Here are a couple of key terms they use explained. Knowing how bankers approach lending decisions can save you time and heartache too. You may want to impress your business banker by throwing in a financial phrase or two the next time you meet.
Loan to Valuation Ratio (LVR). This ratio is the amount lent as a percentage of the market value of the security for the loan.
The higher the LVR, the higher the perceived risk and the higher the likely cost of obtaining that loan. The maximum LVR varies between different types of properties and between lenders. For example, the maximum LVR for residential properties is usually 80 per cent (sometimes less for units, inner city apartments, and luxury properties), for commercial properties it is often 70 per cent. While loans are available above these maximum limits they generally come with either more fees or higher interest rates.
Lenders are cautious people and will be reluctant to lend the total value of the security because valuing property isn’t an exact science and they need to allow for changing economic circumstances and changing property values.
Risk margins. Unlike home loans, business loans are often expressed as a base rate plus or minus a risk margin. The risk margin reflects the assessed level of risk a lender sees in a business and it will vary from business to business. It doesn’t mean the lender thinks it is a bad business (if they did they would not make the loan). By applying a margin to all loans, this earns additional income to hopefully offset losses on those loans that do default.
Next week we’ll look at a few more banking terms. Have you got a banking term that has you stumped?
This post is based on Greg’s weekly column in the Newcastle and Lake Macquarie Post.