CAMPARI PART III – “M” is for MARGIN

If you just joined the series, click here to read the Introduction to the CAMPARI framework.

Like it or not, Banks are like any other business; they are out to make a profit!

In assessing your request the Manager has to satisfy himself that the income the Bank is going to earn fairly reflects the risk they are taking in lending you the money. They cover this risk by the interest rate and arrangement fee they will charge you. The amounts they charge you will then be assessed as a strength or weakness.

Is The Interest Rate Charged Adequate to Offset The Risk?

The first tool the Bank has to mitigate the risk of lending you the money is the interest it charges you. The Bank will add an interest margin to the Base Rate to come up with the overall interest rate at which it will lend to you.

 

The margin depends on the security available, your track record, and your profitability. For smaller businesses, some Banks go for a set rate, on a one-size-fits-all basis. For a start up the margin added will be much higher than that for an established business. The reasoning is that the risk in lending to a new business is far higher than lending to a business with a track record.

 

If you are charged a rate over the Base Rate then, depending on the strength of your business, you may have room to negotiate on the margin being added. The stronger your business is the more room you have to negotiate!

If you are a well-established business and you have managed to negotiate the rate down, then the Manager has to decide whether it’s a good deal for the Bank. For the margin the Bank is earning, could it, by declining your request, use the money being allocated to you for another business and lend it at a better rate? Does the rate that you are requesting reflect the risk the bank is expected to take on? If not then the Manager may assess the pricing requested as a weakness.

 

Is an Arrangement Fee Being Charged?

The Bank will also consider the arrangement fee being charged for doing the deal. This can either be a fixed amount for a borrowing up to a certain amount, or a percentage based on the amount borrowed, such as a fee ranging from 0.25% up to 1%. Again, this may be subject to negotiation if you are in a strong bargaining position.

If a good fee is being charged then it’s a plus point for your request. If a low fee, or no fee at all if you have negotiated well, is being charged then it’s a weak point in the application.

Just as you assess the profitability of a business transaction, so does the Bank. The Manager will take a look at the margin and fee being charged and decide if it’s good or not i.e. a strength or a weakness.

To your success!

Olanrewaju Oniyitan






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