TERRA AG FINANCE - INTEREST RATES: 16th December 2020
Good afternoon,
Having not issued a Finance related update since April earlier this year, it’s now long overdue and especially in consideration of recent events to consider.
A few key developments are the main points of discussion in Finance circles right now:
Covid – vaccine developments are a positive step for obvious reasons, I would think there will be hiccups in the coming 3-4 months with rollouts and effectiveness but a vaccine is probably better than nothing right now…especially if it alleviates future lockdowns which we know are having a greater negative impact than the vaccine itself to business confidence. Economic data releases from a post-lockdown perspective have been very good, and with Xmas/New Year on the doorstep this should further accentuate a recovery for business trading conditions
Reserve Bank and Quantitative Easing – with other events through the year, this topic of QE has gone by without much attention…remember back in the early years of this decade where Global financial markets weren’t really sure of how to manage a central bank pushing money into a financial system…the RBA has been purposefully manipulating the 3 month Swap rates with the intention of reducing variable interest rates without having a cash rate go below zero….like all QE programs previously, expect Equities and Super Funds to be the leading beneficiaries of this program…the impact – shorter term interest rates are cheap (and will stay cheap for a while) and longer term fixed rates are now starting to creep up
Trade Wars – there is no co-incidence that the reported trade issues with Australia are coming at a time where China’s purchases of US Agricultural products are hitting records levels, it is hoped in some reports that under a Biden presidency some normality to trading relationships returns…if Biden lets China move back to the status quo of 3-4 years ago with the US then this may release the reported problems we’re experiencing right now with China…this will take 12 months at least to be able to measure if this plays out like some commentators are suggesting
Whilst we can’t manage or solve for the above they do have an impact on what we do have control over which are our business finances.
Interest Rates are likely to be steady for most of 2021 – particularly in the short term money markets (0-3 years) however expect to see Fixed rates show further signs of increasing (5+ years)
Asset Finance rate are comfortably below 2% - I financed a vehicle last week for 1.89% (3yrs) and Prime Mover for 1.85% (5 years)….perfect opportunity to be upgrading equipment on the back of a harvest, in combination with the Government incentives for asset write-offs at 30 June
On the term debt front it’s a similar story – most term debt should be ranging between the low to high 2’s, there are lot of factors that go into a bank deriving its final rate but most borrowers should be seeing a 2 comfortably in their rates. For example, I renegotiated a Cattle trading overdraft at 2.48% at the beginning of the month – this deal was not completely secured by Land so a level of risk for the banks but with a well presented application and competitive tension between the lenders a great outcome has been achieved
Opportunities to Consider:
Asset Finance is effectively zero cost money – if you’re not sure about whether to upgrade Plant & Machinery in your business then don’t let financing be a reason not to because it is not in the current context
Fixed Rates – whilst the variable rate is excellent the opportunity to take advantage of Fixed rates is always before variable rates increase – most lenders would be wishing for borrowers to fix rates so this in itself is an area to explore with the presence of competition – see the below table showing the change in rates for 5-15 year money (Fixed) vs. 30-180 Day money (Variable)
Working Capital/Overdrafts – finance to run your business day to day has never been this cheap, so if you think you’re rates are on high side in today’s market then engage with us to sit down and complete a review
Crop Finance/Seasonal Finance – not an immediate focus right now but seasonal financing for crop inputs is also seeing positive movements lower between a range of 8-10% depending on crop type/level of funding for inputs etc
As always, give me a call to discuss your requirements or any of the above in further detail.
Regards,
Grant Volz
Director – Terra Ag Rural
Unit 30, 16-24 Whybrow St, Griffith NSW 2680
M: 0418 916 031
F: 02 6964 6095
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