Mark Whitaker from Aycliffe firm Commercial Expert brings some useful financial advice…
Large corporate businesses have been using IRP for many years to help with planning.
But, more recently, banks started making this available at a lower borrowing level to smaller, less sophisticated borrowers.
Whilst this has caused some issues (as reported in the press) it is right, at times, for a borrower to protect his cash flow using IRP.
There are a few things to consider:
• Firstly, there is no such thing as a fantastic deal…the client is merely buying a market expectation of what is likely to happen with interest rates.
• If a business has a “pain threshold” at which interest costs become critical for the continuance of the business, then IRP is something which should be considered.
For example, a property investment company:
• £1.5m portfolio, net rent £75k p.a.
• £1m borrowing, 3% above base rate – interest cost £35k p.a.
• Interest currently comfortably met
• Base rate rises to 5%, increasing interest paid to 8%.
• Interest cost now £80k and the business can’t cover interest.
• Be aware of possible break costs if lending is repaid early
• Take advice from your professional advisors. Ensure you understand what you are getting into.
• There are specialist firms who can advise on hedges and overview deals being offered. If debt is significant, such advice maybe worth considering.
• If IRP is taken up, the risk of interest rate fluctuations is removed and the bank may reflect this is a slightly reduced margin.
Advisory board member