Pricing of Products
Pricing of Products
Each financial instrument is associated with a level of risk and thereby corresponds to a calculated rate of interest. Banks adopt different pricing methodologies
depending on the amount, loan period and the SME’s ability to provide collateral. The table below broadly enumerates the levels of rates existing.
|Product||Level of Rate|
It is also important that the proprietor is able to differentiate between reducing balance loan and flat rate loan.
In a flat rate loan the rate is calculated on the principal amount of the loan for example a fixed/flat rate of 10% is calculated on the loan amount.
On the other hand, under the reducing balance loan, the interest rate for
example 11% is charged on the outstanding amount of the loan after the deduction of the periodic interest amounts.
The flat interest rates are easier to calculate and are normally lower than reducing balance rate however, the SME must be cautious as the EMIs under the flat balance rate is much higher.SMEs should be cognizant to this aspect before availing a loan from the bank and select the most appropriate rate for the business.
Getting the best deal
It is important to shop around and compare interest rates carefully, as they can vary significantly. Interest rates can be fixed or variable. With a fixed rate, the interest will remain constant throughout the repayment period.
With a variable rate, it may fluctuate according to changes to the Emirates Interbank Rate, EIBOR, the rate at which banks lend to each other.
When comparing different loans and overdrafts, the key figure to look at is the Annual Percentage Rate (also known as APR).
This is the rate that will be charged annually once all fees have been accounted for. It may be possible to negotiate a lower interest rate or better terms – if so, it is important to get confirmation in writing.
Keeping eyes open
Review the loan document is recommended for any hidden costs. As well as interest rates, particular attention should be paid to any set-up fees and loan terms – for example, are there any penalty charges for early loan repayment?
Using brokers / intermediaries
It might be worthwhile using a finance broker or accountant to help track down a suitable loan and take care of the application process.