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How to get lower interest rates and why you may not

“How can I secure lower interest rates from lenders?”

Is this a question on your mind? If so, you are not alone.

Let us take Nigeria for example, if you are operating in the power and energy sector the lending rate commercial banks charge is as high as 30%. If you are considered a creditworthy customer the prime rate could be as low as 5% and, shockingly, as high as 25%. And only one bank in Nigeria provides a single digit rate for its prime rate.  The rest are between 11% to 25% for prime rates in the sector. This is according to data from the Central Bank of Nigeria (CBN).

If a creditworthy customer still faces double digit rates it says a lot about the macroeconomy. However, high interest rates also reflect how the customer is perceived by the lender. The riskier the customer the wider the credit spread.

Who is a risky customer?

Simply put, a risky customer is one who may not be able to pay back their borrowings as at when due. The higher the customer’s probability of defaulting, the tighter the loan conditions, including higher interest rates.  

You might be aware of credit ratings of Moody’s and others, but do you know that you also get rated when you apply for a loan? And depending on your performance you could be a triple A, a prime rate client, or a C client, a go-at-your-own risk client.

Banks will decide if you fall into the A, B or C category based on the following:

  • Profitability
  • Balance sheet quality
  • Liquidity
  • Capital
  • Off-balance sheet risks
  • Company management
  • Market position
  • Company operations, among others.

The analyst considering your loan request will assess how you perform under each of these. Depending on your results, i.e., strong, excellent, good, sufficient or inadequate, your alphabetical ratings will be assigned. The credit team will use this assessment to decide if you get the funding or not, and at what terms. Also, depending on your performance you might be able to negotiate better terms or simply be a price taker.

I have heard complains like: if the rates are too high does it not affect repayment? Not if the loan is well structured. And you can bet your bottom dollar that the lender will be paying attention to the loan structuring. The high interest rate and loan covenants is the reward the lender receives from taking the risks of trusting you with other people’s money (OPM). As one banker said to me: the money we lend out is your money. Won’t you want us to be careful with it?

So, do not blame banks for the interest rates they charge. They are simply doing the best they can within the macroeconomic environment they operate in.

How to get lower interest rates

In strong business climates, the United States for example, prime rate clients hold all the cards. They can negotiate favourable rates as their cash flow is strong enough to give the lender comfort. Moreover, since they can simply take their business to other banks, banks have a good incentive to treat these clients well.

For Nigeria, for example, when you consider the difference between 30% and 11%, maybe the prime rate clients feel that they are still getting a pretty good deal (I would like to hear from one of them on this, seriously).

So, if you are an A or B client and want better interest rates what are the options you have?

Before a lender approves a loan, after they have rated you, they quantify the expected loss. That is, if in a worst-case scenario you, the borrower, defaults how much of OPM would the bank lose. The expected loss influences the loan pricing. The lower the expected loss, the lower the loan pricing. And this is where innovation comes in, combining different factors to reduce the expected loss. This could include matching loan maturity to purpose for which the loan is being borrowed; having multiple lenders participating in the same transaction according to their risk threshold to spread the risks and avoid overpricing; credit enhancement and others.

The good news is that these are some of the services we, PUTTRU, provide to our clients to enable them gain access to loans with interest rates that make sense to them.

Firstly, starting with our offline advisory services, we ensure that you know exactly where you stand on potential ratings from banks. We will match you with specialists to assess your profitability, balance sheet, etc. and to advise on how best to strengthen your position even before you come face to face (digitally) with a lender or investor.

Secondly, through the PUTTRU Digital Platform, we connect you with multiple financiers. That way you can negotiate based on their risk appetite.

If your interest is in Project Finance, then you must read our article on: Why project finance may not be best for your energy company.

In all these, PUTTRU remains your friendly neighbourhood spiderman (Just wanted to make sure you were still paying attention). PUTTRU remains your helpful financial advisor for energy sector transactions.

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