What are Bank Bills?
A Bank Bill is an unconditional order by one party to pay a fixed sum - the face value of the bill - at a fixed time to a bank.
Bank Bills are linked to the Credit Provider's cost of funds. Specifically, your loan will have a "margin" above the Bank Bill Swap Bid Rate ("BBSY") interest rate at which the funding is sourced.
Your customer margin is determined by the size of your loan and the overall risk of your application. Your interest rate is rolled over every 30, 60, 90 or 180 days and at each rollover your interest rate is reset to the current cost of funds plus your margin.
Key Highlights of Bank Bills
- Interest is paid in Advance.
- Rates are set by the market (supply and demand) and move at the whim of the market.
- Variable rates are reset every day and are published so they are visible to the market.
- Interest can be paid monthly, quarterly or semi-annually.
Typically for borrowers they are only available when debt facilities are greater than say $3M-5M.
Application of Bank Bills
As indicating in the highlights, Bills typically represent a more complex lending arrangement for the customer. In reality, this is actually providing visibility where a bank takes the risk of fluctuations in the cost of funds on the money market.
In other words, even with a simple or small loan it is still generally funded the same way (i.e. via markets). However, with a bank bill facility the borrower absorbs the risks and benefits of market fluctuations instead of the bank. So if the money market interest rates rise, so too will the overall borrowing cost.
What Interest Rate am I Paying?
Ongoing borrowing cost components typically include these four elements:
Base Rate
In simple terms, a commercial loan will be based on a Bank Bill Swap Bid Rate (BBSY) interest rate or a similar benchmark at which the financier borrows money. To be technical, Bank Bill Swap Rate (BBSW) is calculated first and is a short-term money market benchmark interest rate. BBSY bid is a bid rate reference and is usually five basis points higher than BBSW.
Base Margin
Customer margin is determined by the 5 C’s as explained above. On a bill facility, the interest rate is rolled over every 30, 60, 90 or 180 days. At rollover, the interest rate is reset to the current base rate plus the margin. As an example, this may be quoted as 2.0% over BBSY.
Treasury Margin
Raising money to lend is expensive. Some financiers will separate a cost (called a treasury margin) built into “their” bespoke base rate or identified as a separate cost component. This might be anywhere from 20 to 40 basis points.
Line Fees
A line fee is payable to keep credit available for the borrower to use. A line fee is charged on the loan facility limit. Interest is only paid on the balance of a loan.
Take the following example:
On face value, Option 2 is more cost-effective. However Option 2 includes in the overall rate a line fee of 1.0% (i.e. charged on the limit of the loan), the results can be very different if the limit of the facility is not fully drawn.
More Information?
Contact MCP Financial Services or visit www.mcpfinancial.com.au/client-services/commercial-finance