Higher default rate for SMEs equals higher interest rate
Mr 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.
"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.
But NAB's Daryl Johnson says SME loans are riskier than residential loans.
Mr Pepper's experience is not uncommon. 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 offered by banks and other providers.
Canstar 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 began withholding more of the Reserve Bank cash rate cuts on all types of loans, arguing that they had to pay more for the money they lent customers. But small business received even less of the rate reductions. However, all the major banks passed on all of last month's 0.25-percentage-point rate cut to business customers.
Mr Watson notes that the rates he is quoting are benchmark rates, and individual businesses may pay more or less depending on their risk profiles. But overall they are paying more than home-loan customers.
Mr Johnson, who is 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, so banks need to consider the greater risk when pricing business loans," he says. Mr Johnson notes that the banking regulator, the Australian Prudential Regulation Authority, requires banks to hold more capital against business loans than against mortgages, increasing their cost.
ANZ, Bendigo Bank, Commonwealth Bank and Westpac 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."
Frequently Asked Questions about this Article…
Banks say small business (SME) loans carry higher interest rates because they are riskier and have higher default rates than residential mortgages. The article quotes NAB and Suncorp executives saying business borrowers go into arrears more often, and the banking regulator (APRA) requires banks to hold more capital against business loans, which raises banks' costs and gets reflected in pricing.
According to Canstar research cited in the article, small businesses paying residentially secured business loan rates are charged about 80 basis points (0.80%) more on average than home-loan customers. The article gives an example where a business owner pays about 8.5% while mortgages can be as low as 5.5%.
Not necessarily. Even when a business loan is secured by residential property, banks often charge higher rates than mortgage customers because they price loans by borrower and loan-type risk. Canstar notes the figures are benchmark rates and individual businesses may pay more or less depending on their risk profile.
The article says banks began withholding more of the Reserve Bank cash rate cuts across loan types since 2008, and small businesses received even less of the reductions. However, it also notes that all the major banks passed on last month's 0.25 percentage-point rate cut to business customers.
Canstar’s research quotes benchmark rates, meaning headline comparison rates used to show typical offers from lenders. The article points out these are benchmarks and that individual businesses may be charged more or less depending on their specific risk profile and circumstances.
Yes. The article explains that the Australian Prudential Regulation Authority (APRA) requires banks to hold more capital against business loans than against mortgages. NAB’s executive said this higher capital requirement increases banks’ costs and contributes to higher pricing for business loans.
The story includes comments from NAB (Daryl Johnson) and Suncorp (Tim Buckett), and research comments from Canstar (Mitch Watson). It also notes that ANZ, Bendigo Bank, Commonwealth Bank and Westpac declined to comment. The article features the experience of Plum’s owner, Shane Pepper, as a small business example.
The article suggests being aware that business loan headline rates are often higher than mortgage rates because of higher default risk and regulatory capital costs. Because Canstar’s figures are benchmark rates and lenders tailor pricing to individual risk, everyday investors and business owners should compare published benchmark rates and understand that their actual rate will depend on their business’s risk profile and the lender’s pricing policies.
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