Big bank loyalty costing businesses thousands

| May 15, 2019

Every year, thousands of Australian small and medium business owners take out loans to help buy equipment, hire new staff, or ride out periods of low cash flow. And for a majority of these businesses, the Big 4 banks are the first on the call sheet. In fact, 70% of business loans are issued by the big banks.

But despite their hold on the market, recent research by the team at Mozo found that loyalty to the Big 4 could wind up costing small business owners thousands of dollars in extra interest repayments.

Big banks unwilling to pass on cuts

Since 2014, the cash rate has decreased a total of 100 basis points, but this has hardly flowed through to the Big 4’s range of business loans. In five years, the average rate for their mortgage secured business loans has dropped from 6.64% to 6.07%, a difference of only 57 basis points.

Challenger banks – like Bank of Queensland, Bankwest, Bendigo Bank, Heritage Bank, St. George and Suncorp – have not been so stingy. Five years ago, the average business loan rate from these banks hovered around the same mark as the major banks — 6.60%. It’s since dropped to 5.19%, a difference of 141 basis points, and more than twice as much as the major banks cuts.

Why is the playing field so lopsided?

The overall picture is that the major banks have been unwilling to cut business loans in line with the cash rate, while challenger banks have cut well beyond it. Why, then, do so many still choose to bank with the big banks?

A lot of the time, it comes down to ease of access. Despite offering less impressive rates for business owners, the fact that the big banks have more points of contact available than the new breed of fintech business lenders or any other bank puts them at a considerable advantage.

Beyond that, it’s about relationships. If a small business owner has a home loan with a bank, they are likely to also use that bank for their business needs. The big banks have most of the mortgage customers so they also have most of the business customers.
How much do you stand to save?

But considering the rates on offer, Australian business owners might be better served venturing outside their comfort zone. Any amount of money you can save by not having to pay fees or interest goes directly to your bottom line. An 88 basis point difference between interest rates isn’t anything to scoff at.

By comparing the average rate from the Big 4 banks with the average rate from the six challenger banks, we found that if you’re taking out a loan of $250,000 over five years, you stand to save $6,007 by opting for the latter. With such a wide gap between the two, the question of who offers the best value is a no-brainer.

The services offered by challenger banks are just as secure as those offered by the major banks, and when it comes to accessibility, you’ll be able to do your banking wherever there’s an internet connection. If you want the most competitive rate on a business loan it’s only sensible to compare what challenger banks and fintech lenders are offering.