By Christopher Niesche
Shane Pepper has put his house up as security for his business loan, but is frustrated his bank charges him a much higher interest rate than the home mortgage rate.
Pepper, the owner of Plum which makes babywear and sleepwear for children, says he pays about 8.5 per cent for his residentially secured business loan, much higher than home mortgage rates, which can be as low as 5.5 per cent, even though the bank has the same security.
Shane & Eugenie Pepper are perplexed as to why they pay less for their home loan than their business loan.
“I think a loan's a loan whether you want to put it towards building a shack at the back of your house or you want to put it towards your business,” says the owner of the third-generation family business. “It shouldn't be classified as commercial or whatever.”
Pepper's experience is not uncommon.
NAB's Daryl Johnson says SME loans are riskier than residential loans.
Have your say - should SMEs pay more for a loan?
Small businesses are paying on average about 80 basis points more for their residentially secured loans than home loan customers, according to figures from Canstar, a research house that compares interest rates being offered by banks and other providers.
Research manager Mitch Watson says that at the beginning of 2008, small businesses and home mortgage customers were paying roughly the same rates.
Since then banks have started withholding more of the Reserve Bank of Australia cash rate cuts on all types of loans, arguing that they have had to pay more for the money they lend customers. But small business loans received less of the rate reductions. All of the major banks passed on all of last month's 0.25 per cent cut to the cash rate to their business customers.
Watson notes the rates he is quoting are benchmark rates, and individual businesses might pay more or less depending on their risk profiles, but that overall they are paying more than home-loan customers.
Daryl Johnson, executive general manager of nabbusiness, says the difference in price is because business loans are more risky than home loans.
“Business loans have a higher default rate than mortgages, and as such banks need to consider the increased risk when pricing business loans,” he said. Johnson also notes that the banking regulator, the Australian Prudential Regulation Authority, requires banks to hold additional capital against business loans compared to mortgages, increasing their cost.
ANZ, Bendigo Bank, the Commonwealth Bank and Westpac all declined to comment for this story.
Tim Buckett, executive general manager of customer development at Suncorp, says business borrowers pay more than mortgage holders, even when they're offering the same security as home owners, because of the higher risk of default.
“Small businesses go into arrears and miss payments on loans more often than the average mortgage holder of residential property,” says Buckett. “It's not just the security that determines the risk of the loan. The other factors are the cash flows that are servicing that loan, so if the cash flows are coming from an individual who's got a job and has a history of a steady job, then that is more stable than the cash flow from a business.”
Suncorp Bank's Business Essentials loan, which is secured against residential property, is charged at a rate of 6.09 per cent. Its variable home loans, by contrast, can be as low as 5.29 per cent for larger borrowers.
Buckett says it costs more to issue business loans because there's a lot more work involved in assessing the creditworthiness of businesses. “It is more complex for a small business owner because we need to spend more time looking at financials to work out does this business earn enough money to pay the loan back, whereas a traditional mortgage you simply get the last three pay slips and we can do a pretty easy calculation.”
Instead of charging an upfront fee to cover these costs, it's built into the loan in the form of a higher interest rate. “The market tells us that they want to avoid fees,” says Buckett.
Buckett agrees that home mortgages are more politically sensitive than small business loans because of the attention they get, but rejects suggestions by the Council of Small Business of Australia that this allows banks to charge small businesses more.
“The fundamental reason is the different risk profile, and if there were massive profits in there then a competitor would come in very quickly, drop the rate and win a whole bunch of business and take that profit,” he says. “Banks are very good at finding ways to make money.”
Peter Strong, chief executive of the COSBOA, says the small business lobby group has always believed the difference in interest rates is unfair.
He notes that someone wanting to use their home as collateral to fund their business has to pay a higher rate than someone wanting to borrow against their home to buy a new boat or go on holiday.
“We believe there should be no difference: if you've got your house on the line, you've got your house on the line, whether it's for an overseas trip or your business.”