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Importance and ranking of Price, Quality and Service

As with most things we purchase, we are governed by the three aspects of Price, Quality and Service – or the PQS Matrix as we have called it.

As with most things we purchase, when you talk to people about borrowing money, their top of mind consideration is the price they are likely to be charged (which is commonly and as we shall discuss later erroneously confined to the quoted interest rate).

Yet, when you discuss further as to what sort of facility they need, the talk turns to things such as how much they can borrow against the security they can offer the lender and whether there are redraw facilities, early exit options and the ability to make extra payments. These optional extras’ are the quality aspects of the loan – and each loan is different (often very different) as to what you can borrow and what you can or cannot do during the term of the loan.

And lastly, when people talk about their experiences with banks and financiers, they raise issues such as ‘customer service’, ‘responsiveness’, ‘flexibility’, ‘reasonableness’ and ‘ease of use’ as being key considerations. These are the service components of the loan.

From the PQS Matrix, which is most important? Price, Quality or Service considerations?

The answer may surprise you. From discussions with many business owners, service is usually the main reason people use when they are considering changing lenders. The quality aspects of the loan or lending facility are often the main factor when choosing a particular loan and price comes in at number three. Price is almost taken as ‘the price I have to pay to get what I want’.

This prioritisation of Service, Quality and then Price will not surprise those of you who have been involved in market research.

Price is often raised as the ‘top of mind’ consideration but when it comes to an actual decision, it comes a long way down the list.

And, as with many items you purchase, the price of a loan is not just restricted to the ‘headline’ price (the interest rate) but there are other (and often unstated except in the fine print) price aspects which can have a significant impact on the total amount you end up paying to the bank. [One current example in the area of finance is the ‘monthly service charges’ being charged by the major retailers on interest-free credit purchases – these charges can amount to over 5% pa of the purchase price].

To further emphasise the importance of service for the decision-maker, when we ask a client whether they will consider swapping lenders and financiers, they often say ‘no’ because either they have a good relationship with their existing relationship manager or, because they fear that the new financier will be no different or no better than their existing one (i.e. ‘better the devil you know’).

PRICE CONSIDERATIONS

As noted earlier, price is not just about interest rates. As with the difficulties in quantifying the benefits of different service offerings, the other price issues such as upfront costs (e.g. bank charges and loan facility set up fees, legal fees and valuation fees), ongoing fees and charges and break costs are often difficult to compare, as they are not usually part of the sales discussion when you are seeking a new loan. To make matters worse, some of these charges and penalties can be quite significant.

When choosing financial products and facilities, it is important to address all these concerns, or work with someone who understands your needs today and tomorrow, and will ensure these needs are met.

To assess price considerations, you need to gather information on all the fees and charges (i.e. both those that are fixed charges and those that vary with your usage (e.g. per transaction). Most people do not have the time, patience or expertise to work this out for themselves, and rarely will a financier assist you to do this exercise in a meaningful way.

It is a good idea for you to work with someone who can calculate the total cost for you quickly and easily. Working with someone who can do this for you is important if the total price is going to be a consideration for you.

QUALITY CONSIDERATIONS

There are many quality considerations when looking at different loans and bank facilities. The most important is often the amount you can borrow against the assets you are prepared to put up as security.

The amount you can borrow is dependent upon a number of factors, the most important of which is the value of the asset(s) you are able to offer the lender as security against the money you are borrowing. In-home lending, the amount you can borrow is normally a relatively simple equation and is based upon the estimated value of the property. With a business loan, a lender will typically take into account the value and quality of working capital assets (debtors and stock) and fixed assets.

Other factors which may influence the amount you can borrow include the likely income and stability of that income over the future years, your past credit history (i.e. have you repaid past debts) and the level of existing debt you need to repay.

For businesses, future income and credit performance will be assessed based upon past financial performance as well as future profit and loss, balance sheet and cash flow projections.

In addition to the amount a lender will lend to you, the quality aspects of a loan will include aspects such as:

  • The term of the loan.
  • Does the loan need to be repaid on a regular basis (typically referred to as a Principal and Interest facility) or can be repaid all at once at some future date (an Interest Only facility)?
  • Can the loan be repaid in variable lump sums during the course of the term of the loan with a consequential reduction in the level of interest required to be paid?
  • If the loan is repaid early, can it be redrawn at a later date and if so, to what level?
  • Can the loan be repaid early without penalty?
  • Who is required to guarantee repayment of the loan if the borrower defaults?

When making an assessment of these considerations, it is important to ask about them when you first discuss it with your financier or financial advisor as they can get overlooked when setting up a facility and once a loan is in place, it is nearly impossible to vary its terms without starting all over again.

SERVICE CONSIDERATIONS

‘Front line’ banking service is often difficult to compare and it often depends upon who is working that day at the branch or on the phone.

However, the service you require which is associated with reviewing, updating and negotiating a new financial facility can be more easily determined. And it may surprise you to know that from time to time, some banks have developed a reputation for looking after their new customers better than their existing ones – seriously!

To make matters more complicated, the level of service for new versus existing customers can vary over time and it will often depend upon the marketing push coming from higher up within the bank. Not looking after existing customers as well as new customers can be an unintended or even intended consequence of decisions made from ‘up high’.

You would think that banks would follow the business mantra ‘it is cheaper to retain an existing customer than find a new one’ but often this seems to be ignored by front line banking staff – although we are not sure why!

When seeking a new loan, many people go directly to their existing bank as they have had a prior and often long term relationship with their banker. This can often be a good place to start.

However, as with most things in which you are not an expert, the saying ‘you don’t know what you don’t know’ is a relevant warning and consideration when talking to your existing financier. They will tend to tell you what they know and what they think you need to know. And at times, this can be very different from what you really need to know.

Unless you are able to take the time to shop around, compare and then question, little things may go unnoticed. These little things may become big things for you down the track. A good example is the break costs associated with most fixed interest rate facilities and some cashflow facilities. Or, it could be the provision of a redraw facility on a loan which has been paid down more quickly due to cash being available.

USING BROKERS VS GOING DIRECT TO LENDERS

Brokers can be a good resource to use when you want to find out more than what your current financier has to offer.

When you are using a broker, however, you need to make sure the broker is acting for you and not the lender and financier (most brokers get rewarded by the financier for placing business with them – and sometimes the rates of reward can vary considerably).

Brokers also vary greatly in experience and expertise.

Experienced brokers who understand your business are hard to find. Many finance brokers are experienced but in very limited areas. They may understand housing loans but not cashflow and business finance (ask your broker if they can prepare a 3 way forecast financial model – most cannot; yet it is necessary for most business finance packages to have an integrated forecast finance model of profit and loss, balance sheet and cash flow so the banker and their credit team can make an informed decision).

WHAT YOU NEED TO DO TO GET THE BEST FINANCE DEALS

You need to understand what a lender or financier requires of you when you are approaching them for finance. As with most things in life, planning allows you to remain in a position of control. And, planning requires a few things to be thought through before you start approaching a lender.

A lender is most concerned about risk. Yes, they would like your business and at times they appear very eager to get it, but that enthusiasm is always tempered by a backroom credit analyst (who you don’t get to see but who assesses your business risk before giving the green light to your finance application).

You can minimise the perception of risk by being prepared and having a well thought out business plan for the finance application. A well-prepared finance application will also open doors to financiers who might not otherwise be amenable to lending you money.

A well-prepared plan, particularly one which is clearly part of the business strategy process, will give lenders a lot more confidence than one which has been prepared solely for the purpose of raising some much-needed cash.

The trade-off for having a planning process is that a borrower may get better finance rates and/or they may get fewer restrictions on the security required (for example, a limitation on personal guarantees required). This will not only result in cheaper money but also may release some of the borrower’s or the guarantor’s assets for additional purposes outside of this finance application.

PREPARING YOUR FINANCE PLAN

In preparing your plan, whether it be for a home loan or a business loan, take into account the following key points which most financiers look for when they consider your finance application. Whilst this has been written from the perspective of a business, it is relatively easy to translate the business aspects into your personal situation.

Purpose: why do you need the money

Proposed Terms: how much money is being requested; what type of facilities are required (e.g. lines of credit, commercial loans, overdrafts, trade finance, letters of credit, lease finance, interest-only loans, principal and interest loans); the time period the money is required for; how and when the money is to be repaid; and, what security is being offered by the borrowers and guarantors to protect the financier from risk should the loan ever be in default.

Profile of the Borrower: what does the business do, what are its major products, who are its major customers and suppliers, and, have there been any changes since previous communication with the financier. This section may have to be reasonably detailed depending upon your previous relationship history with the financier and the purpose the finance is being requested. It may need to include a SWOT analysis (Strengths / Weaknesses / Opportunities / Threats) if the business is unfamiliar to the lender.

Ownership Structure: the ownership structure including trusts, subsidiaries etc. may be relevant to a financier who is lending to a legal entity which does not have direct control over all the business or assets used in the business.

Directors and Management: financiers are very interested in the executive and non-executive team and their track record, as they are the ones being charged with delivering on the business plan. Where directors and managers are also the owners (either directly or indirectly), the financiers like to obtain their commitment to the plan by seeking guarantees from those individuals who will share in the upside if the business is successful.

Financial support and verification: it is necessary to show what has happened in the business over the past few years as well as how the planned direction fits into and compares with the history of your business. Further, a financier will be looking to see how the projected future performance will enable repayment of the monies you are requesting. They will also be interested in confirming the future balance sheet position of the business to ensure the projections are realistic and that they continue to support your level of borrowings.

In conclusion, a well thought out plan, of which finance is just one component, will ensure that you get the best hearing possible from financiers. This opens the doors for you to utilise your business assets so they work harder for you.

Where we are now

Over 6 in 10 home loan borrowers now use a broker (but only 2 out of 10 businesses – and this will change rapidly now that businesses are getting access to a lot of borrowing options which were not previously available to them).

And, a recent survey showed that 1 in 4 borrowers who were with a High Street Bank are looking to move away from their current bank.

Food for thought for the Big Banks you would think…..

In the beginning…

Before I started my finance business, I had identified that banks were not always a borrower’s best friend.

It was not that they were necessarily ‘against you’ (although that sometimes was the case from anecdotal evidence you would hear).  Rather, their service levels and service responses and pricing advantages were ‘neutral’ or ‘non-existent’ for existing customers.

For new customers, they would fall all over you, even making out that you had access to a ‘relationship manager’.  In reality, once the loan was signed up, and you were locked in, your relationship manager never contacted you again with respect to your loan.

Now, this scenario is nothing new to those who are used to dealing with large institutions.  Phone companies, energy utilities, finance institutions, insurance companies – they all tend to look after new customers better than their existing customers.

As someone who has studied marketing, I never quite understood this given that it is cheaper to retain an existing customer than find and sell to a new one.  But then again, I do understand because I also know these large institutions rely upon ‘customer apathy to change’. Because of this reluctance to change, institutions, who largely play a numbers game, take the view that they can reduce the cost of servicing existing customers to pretty close zero and only lose a small number of customers to churn.

Unfortunately, what they seem to miss (or perhaps underestimate) is the silent aggravation they cause amongst customers who want more and want better – and who, if they are given a real choice, will ‘up and go’.

So, what does this have to do with brokers?

Well, brokers provide the tools for customers to positively action change without the customer having to do the hard work (ok, there is still a bit of hard work to do but most of the heavy lifting is done by the broker – assuming you have a good broker!).

Here are some reasons why you can consider using a broker (and yes, we are in this for a free plug for BIR Solutions so read on! 😊 ).

  • As noted above, your money is most likely to come via a broker who will source a great deal for you; perhaps from one of the Big Banks but perhaps from a non-retail bank or a credit union or non-bank financier.  There are over 30 lenders to choose from – and apart from the Big Banks, most of them only use finance brokers to get their products to you.
  • Going down to your local high street Big 4 Bank is like shopping from a ‘one brand’ retailer.  You have to buy what they are selling – and if you don’t fit into their branded dress or pants, tough luck.
  • Banks are not required to give you their cheapest product.  If you end up buying a more expensive product when a cheaper one would do, well, again, your tough luck.
  • No bank is required to update you if they come up with a better offer for their customers.  In fact, they tend to reserve these ‘better deals’ for new customers they are trying to woo.
  • Banks don’t review your loan and its suitability until….. well, until you make the decision to refinance.
  • You don’t have a relationship manager (particularly if you have to ring a 13 number!).

 

If you would like to find out more about how to get a great deal from a broker, give us a call – and since we like to be personal, you can ring us now 1300 989 878 or email us at moreinfoplease@bir.net.au

Reprint of an article in www.smartcompany.com.au  July 2010 by Patrick Stafford

Whilst not a recent article, it nicely explains a lot of the issues expanding business face.

Background

James Spenceley co-founded wholesale telecommunications provider Vocus in 2007, and since then the  company has exceeded his expectations, turning over profit every year, with 2008-09 revenue of $5.2 million. The company was listed on last year’s SmartCompany Start Up Awards. But the biggest improvement occurred only this year, when investment firm Investec bought the company for $20 million, and listed it on the ASX as Vocus Communications. Spenceley says the company is now able to pursue a number of expansion projects overseas that it couldn’t have done before.

The key, he says, is finding a good investor. Spenceley believes small businesses looking for investment should analyse themselves constantly and look for ways to make themselves attractive to larger, cashed-up companies

Are you happy with the ASX listing this mouth ?

Absolutely. We knew we had prepared, we thought the offer was reasonably priced it was great to see such a good result from day one . We think it started off very Strongly.

 

Would you like more information? You can ring us now 1300 989 878 or email us at moreinfoplease@bir.net.au

In other articles, we have shown that brokers now process more loans than the Big 4 Banks – about 6 out of 10 borrowers now use a broker and 1 in 4 borrowers who are with a Big 4 Bank are looking to change.

When shopping for a loan, here are 6 common issues borrowers need to consider before seeking a particular loan. Of course, if you use a broker, they will (or should) ensure you have considered all of these issues before you proceed with an application for a loan.

 

1. Low Advertised Interest Rates

Borrowers are often wooed by the advertising of low-interest rates.  And understandably, they often shop online to find the lowest deal.

What they don’t realise is that the lowest advertised deal is just the same as a car advertisement – the key word is the word immediately prior to the advertised price ‘from…’.

And like a car, the cheapest rate is often the ‘no frills’ rate.  It doesn’t have as many features as the premium model and like the cheapest car, when you get behind the wheel, it can feel a little cramped and dare I say it, ‘featureless’.

Plus, you soon discover that not many customers (and certainly not all customers) fall within the small group of customers who fit the profile for this ‘featureless loan’ (unlike a car where the customer chooses which car to buy, with a loan the banks decide who fits which loan – you can want the loan but the bank may not want you!).

If you use a broker, they will work with you to ensure you set realistic expectations of the rate you are likely to be able to negotiate.

 

2. Credit Cards

We all love our credit card!  And, we love a high limit so we can ‘always have enough in reserve for those emergencies.

The problem is the lenders like to look at the limit and not the amount you spend each month – even if you pay it off before incurring any interest charges.

To put this into an example, a credit card with a $20,000 limit which is only used up to $4,000 per month and paid off each month end is assessed by the lender as being the equivalent of $20,000 in debt – not $4,000 and certainly not $Nil.

Good brokers review your limits before you start the loan application process as they know what a particular lender is looking for and whether your credit card limits might impact the amount you can borrow.

 

3. Credit offered by retailers: aka ‘After Pay Lenders’

Every time you obtain credit from a shop, guess what happens: the lender who provides the finance for the retailer has a peek at your credit file. And this peek is noted for all other lenders to see – even if you don’t go ahead with the loan.

And, every time a lender has a peek, it adversely affects your credit score. You can have a perfect credit history in terms of zero defaults but these peeks represent a warning to a potential lender. They suggest you are looking to borrow money ‘here, there and everywhere’. Now, this might not seem fair but it is the world of credit we live in.

Sometimes, your broker will suggest you ‘cool your heels for a while’ and get your credit score up before applying for a loan.  Or, they will assist you set a realistic expectation before you start so you don’t get a nasty shock later on.

 

4. Honeymoon or introductory home loan rates

Quite naturally, borrowers are attracted by the interest rate quoted for the first year of a contract.

These facilities normally revert to the “standard variable rate” after the first year.  The issue is, is this standard variable rate equal to or worse than the rate you can negotiate up front?

Chances, are, once a lender has got you in with their honeymoon rate, the rate you revert to after the honeymoon period is going to be higher than the rate you can negotiate up front – particularly if you are using a broker as brokers know ‘how low you can go’.

 

5. Fees and Charges

Most, but not all loans will probably have a range of non-negotiable establishment fees for the application process, the lender’s legal costs and the valuation fees.

A broker will be aware of these costs for each lender and will factor them into your funding needs.

Also, there may be exit fees, particularly for fixed rate loans if you want to exit the fixed rate portion before the term for the fixed portion has expired.

Your broker should ensure you have considered this issue and made sure you have considered what is best for you in terms of the mix of variable and fixed loan amounts.

 

6. Fixed Rates

These days, many borrowers consider putting a portion of their loan in a fixed rate loan so they get some certainty as to the repayments.  Whilst this is a good idea to consider this option, it is not without its own risks and issues.

Apart from exit fees for an early exit of a fixed rate loan, fixed rate loans can be more restrictive in terms of some loan features such as interest offset accounts, extra repayments and redraw facilities.

Your broker can explain to you what restrictions will apply to your fixed rate loan with a particular lender before you dive in to ‘lock in a good rate.’

 

Would you like more information? You can ring us now 1300 989 878 or email us at moreinfoplease@bir.net.au

Are you a winner in this year’s budget?

The 2021-22 budget has now been released. There’s a lot of talk and I want to help break down the key initiatives targeting home ownership which could help you get into the property market sooner.

 

Family Home Guarantee 

This is a newly created government scheme that will see 10,000 places made available over a four year period, this means 2,500 First Home Guarantees will be made available each year.

This scheme will provide single mums and dads with dependants the chance to build a new home or purchase an existing home with a 2% deposit without having to pay lender’s mortgage insurance, also known as LMI.

While this is a great initiative, it’s important to note that it will be a competitive market out there. With interest rates at an all time low and a mortgage broker on your side, I can help you understand your options and see if you’re eligible for this scheme.

 

CLICK HERE TO GET YOUR FREE REPORT

 

First Home Loan Deposit Scheme (FHLDS) 

Also known as the New Homes Guarantee, this scheme will provide an additional 10,000 places in this year’s federal budget.

If you have a 5% deposit, looking to build a new home or purchase a newly built home, this scheme could help you get into the property market sooner.
Of course, getting a 5% deposit for a home is easier said than done. That’s where I can help! I’ll review your situation, look at the options and provide a solution that suits you and your needs.

It’s important to note there are property price caps that vary from state-to-state for this scheme.

Again, this scheme is ultra competitive, reach out to me if you’d like to know more.

 

Super Saver Scheme (FHSSS)The FHSSS scheme allows you to save money for your first home inside your super fund. In this year’s budget, the government announced that the maximum amount of money able to be released through the Super Saver Scheme has increased from $30,000 to $50,000.

 

Instant asset write off 

Good news if you’re a business owner! The instant asset write off scheme was due to expire on June 30, 2022.  However it will now continue for another 12 months, giving business owners the chance to use it for all eligible assets acquired from 7.30pm on October 6, 2020, and first used or installed by June 30, 2023.

Even though it can sound like a lot of noise, the release of the Australian budget is a good time to reflect and ponder on your own budget and goals. I’m here to help – whatever you might need. Simply call or email and let’s discuss how I can support you.

Disclaimer: This document has been created by Loan Market Pty Ltd (ABN 89 105 230 019, Australian Credit Licence number 390222). It provides an overview or summary only and it should not be considered a comprehensive statement on any matter. You should before acting in reliance upon this information seek independent professional lending or taxation advice as appropriate specific to your objectives, financial circumstances or needs. Information included has been sourced from third parties and has not been independently verified. Accordingly, Loan Market Pty Ltd is not in any way responsible for nor provides any warranty express or implied as to its accuracy or relevance. It’s important to note the budget proposals are not yet legislated and are subject to change or defeat in the Australian Parliament.

 

BIR Solutions is part of Loan Market

Source: https://www.loanmarket.com.au/news/are-you-a-winner-in-this-years-budget

 

Would you like more information? You can ring us now 1300 989 878 or email us at moreinfoplease@bir.net.au