Understanding interest rates and lending approvals for business and agri customers

The interest you pay on loans, overdrafts and flexible facilities covers the cost to borrow money. Your total cost of borrowing is made up of the cost to ANZ of sourcing funds to lend and the borrowing margin.

Banks need money so they can lend money. This money comes from different sources, including: 

• External debt
• Money customers deposit with us
• Capital our shareholder invest in us
• The capital we’re required to maintain for our loans under regulatory guidelines.

The different costs of sourcing these funds reflect the global economic environment, regulatory settings (such as capital requirements), monetary policy, wholesale funding markets, and shareholder returns.

Your farm or business borrowing margin is based on our assessment of:

• Your credit worthiness, which includes how well you manage your finances 
• The value of security you can provide to cover your lending limits.

An improved borrowing margin potentially lowers your loan interest rate. However, your interest rate might not reduce, e.g. if our cost of sourcing funds to lend increases at the same time your borrowing margin improves or reduces.  

If you manage your finances well, we may be able to offer a lower interest rate, reducing your cost of borrowing. Good financial management also makes it easier to get lending approved. Before applying for lending, it pays to check and, if needed, improve your financial position. This can range from the basics, like paying bills and tax on time, to building equity and improving loan-to-value ratios. 

This article includes tips to help you choose lending and repayments that suit your financial position. Being prepared also makes the application process simpler and more efficient.

By understanding how your farm or business manages its cash flow, debts and assets, we can be confident:

• The amount and type of lending fits your business needs or goals
• You can afford repayments without getting into financial difficulty
• We're meeting our obligations as a responsible lender. 

Wider benefits for you and your farm or business include: 

• Peace of mind, knowing you can always pay your bills on time
• Better cash flow
• Easier to budget
• Improved business resilience.

Debt can be a useful business tool, if you plan how to use it and how to repay what you owe. 

To assess lending applications, we look for warning signs like falling behind on repayments or overdrafts or flexi facilities that are maxed out most of the time. 

Businesses and farms with good financial management:

• Borrow what they can afford to repay 
• Have healthy balances on any overdrafts or flexible facilities, with enough to cover unexpected costs without exceeding the limit (also called headroom)
• Regularly check if overdraft or flexible facility limits meet their needs
• Avoid applying for multiple overdraft limit increases – or credit cards if you’re a small business.

Sometimes you may not have enough money available, e.g. an unexpectedly high bill or a customer hasn’t paid you. 

It helps to act fast. Examples include transferring money from another account or talking to us to change your agreed limit.

Cash flow means the money coming in from sales, and going out to pay wages, bills and other expenses. To stay in business, you need more money coming in than going out.

Cash flow forecasts help you see when you have enough to pay what you owe, and when you might need a Plan B. If your business is growing or changing, this is even more important.

We use up-to-date financial reports like cash flow forecasts to get an accurate picture of your business position and ability to afford loan repayments. It helps you get lending that best fits your business needs or goals. It may also help you qualify for a lower interest rate. 

Businesses and farms with good financial management:

• Set up ways to accurately forecast cash flow, e.g. accounting software
• Monitor it regularly
• Consider the impact of future changes, e.g. repaying a new loan, seasonal income fluctuations, onboarding a major customer
• Spot potential issues and work with their bank to prevent unplanned debt.

To assess lending applications, we look for warning signs like overdue tax or supplier payment arrangements that may impact your ability to repay new lending.

Our article on cash flow forecasting has some great tips, as well as a template to help you get started.

We consider your financial results from the past year.

We know farming has its ups and downs. So, we take a longer-term view of your finances, looking at trends over three years. Examples include:

• Profits outweigh losses over time
• Profits more frequent than losses  
• Earnings vs production costs – the size of this gap shows your financial resilience.  

Equity is the net worth of your business. It’s shown on your balance sheet as the value of your business assets minus any debts (liabilities), e.g. wages, loans. 

When applying for loans and credit, it helps to have higher equity and lower debt levels. This equity-to-debt ratio shows a lower risk of defaulting on repayments. You’re more likely to be able to borrow more and may get lower loan interest rates.

You can build up equity by:

• Bringing money into the business, e.g. keep profits in the business, seek investors
• Reducing debts e.g. pay off loans faster.

Think about how much cash you draw from the business. If you can afford to reduce it, it can help your balance sheet remain robust.

Secured loans tend to have lower interest rates than unsecured loans, overdrafts and flexible facilities.

Secured loans require an asset for security or collateral. If the customer does not repay the loan, the lender can sell the asset. It’s often the asset being bought with the loan, e.g. property, certain vehicles, livestock.

Your farm or business may be eligible for lower-rate lending such as green loans for business projects that will have a positive impact on the environment.

When something changes in your farm or business, it may impact your lending or credit arrangements. For example, you may want to talk with us about:

• Increasing your overdraft limit
• Changing loan repayments, e.g. if your income drops
• Paying off a loan faster
• Taking out a new loan to fund your business goals.

Remember to prepare for unexpected costs with a cash cushion. Examples include a business savings account or undrawn funds in an agreed overdraft (also called headroom).