Be Wary of Using Bank Bills

Part 1: An Understanding, plus the Hidden Costs

WHENEVER YOU ARE financing a commercial property investment or a business, the types of funding can be broadly classified into two categories: bill facilities and non-bill facilities.

The Concept

Bill facilities are charged as a margin over the inter-bank lending rates, published each day in the Financial Review as commercial bills; while non-bill facilities are charged as a straight interest rate.

The funds for these facilities may also be raised through the money markets, but they are priced on a simple interest rate basis over a loan term.

As a general rule, when dealing with the major four banks, bill facilities are recommended for larger commercial loan facilities, at least over $1million. Whereas, non-bill facilities are recommended (and are more attractive) for smaller borrowers. Although, some other smaller banks and non-bank lenders offer non-bill facilities up to around $5m.

For larger loan amounts, a strong commercial borrower may be able to obtain a better interest rate through a bill facility, as they are generally priced for risk.

Therefore, banks will have discretion to provide a very sharp margin to the right borrower; although they will generally only do this if the loan amount is significant.

For this reason, the majority of medium-sized businesses with bill facilities will have the added security of property attached to them.

The Seduction of Lower Rates …

While the low rates are of course an attraction, there are pitfalls associated with such facilities; and these should be taken into account whenever you contemplate a bill facility for your business or commercial property.

Firstly, you should take into account the fees associated with bill facilities, when weighing up a product offer. This is particularly valid for variable facilities, which are based on the 30, 60 or 90-day bills.

Each time a bill roll over, you will also incur further fees. These can vary, but are usually $150 to $300; and need to be taken into account, when assessing the overall costs of the facility.

However, bank bills generally do not provide any re-draw options. But more on that in Part 2.

The important thing to realise is … you will incur a “line fee” charged on the fully drawn amount; and also have heavy “get-out” costs (particularly with fixed-bill facilities).

Bottom Line: For these reasons alone, business borrowers look to avoid these facilities where possible; and commercial property investors certainly need to approach them with care.

And next week’s article will explore how you can unwittingly forfeit your future flexibility.


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