As a business owner, you might feel the effects of what some people refer to as “loyalty tax”. This is where your existing lender charges you higher interest rates compared to new clients for the same type of loan.   It’s natural to think loyalty should earn you better terms, but the reality is often the opposite. 

Lenders will sometimes drop their rates when negotiating with new clients as a way of winning new business, but keep existing clients’ rates the same – or even higher – because they know you’re already on their books. 

As a result, business owners can end up paying more for their loans simply because they’ve stuck with the same lender for too long. 

How can business owners overcome loyalty tax? 

It can be easy for borrowers to secure a loan, agree to the terms and move on. Once a loan is approved, reviewing the terms and interest rates can fall to the bottom of your to-do list. But, not reviewing your terms regularly can lead to you paying more than you need to. This can affect your cash flow and ability to expand or adapt to changing market conditions. 

The good news is that there are ways you can combat the loyalty tax. The first is to simply ask.  

With the help of a finance broker, you can approach your lender and ask for a more competitive rate. Lenders often have room to negotiate, especially if they know you’re considering moving your business elsewhere. Your broker can leverage their market knowledge to push for rates that reflect current conditions, potentially saving you thousands of dollars.  

Another way to deal with loyalty tax is through refinancing. This means taking out a new loan to pay off the existing one, ideally with more competitive rates and terms. Refinancing benefits go beyond securing lower interest rates. 

First, the process can help you reduce your monthly repayments, freeing up cash flow that can be reinvested into your business. This can help with day-to-day expenses, funding new projects or expanding your business. 

Second, refinancing can be a good time to consolidate multiple loans into one. If you have several loans with different rates and terms, you can refinance them into one loan with a single interest rate. Not only does this simplify your financial management, but it can also save you money if some of your loans have higher interest rates or longer loan terms. 

Third, refinancing allows you to adjust the loan structure to better suit your current financial position. It is quite likely your business’s finances have changed since you first secured your loans, whether for the better or worse. So, refinancing means you can find a loan product that suits your current conditions. 

Finally, whether you are consolidating loans or simply looking for more favourable rates or terms, refinancing can help position your business more favourably financially. Lowering your monthly repayments or shortening your loan term will likely make it easier for you to repay your loan, meaning less chance of defaulting and damaging your credit score.  

How do you know when to refinance? 

If you’ve been with the same lender for several years, now may be a good time to review your loans. With the help of your finance broker, you can explore options from other lenders to identify the potential for savings through refinancing. 

Once you have identified new options, your finance broker can also help you negotiate the terms and rates of the new loan with your new lender. Your broker will use their knowledge to secure rates that are sensitive to the current market and your needs.  

Credit Representative 541104 is authorised under Australian Credit Licence 389328.  Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product.