Business Offset Account
Why it makes more sense than saving or making extra repayments
How would you like to pay off your business loan fast? With a business offset account, you can!
By having your business cash flow funds in the offset account, you’re not only offsetting the interest on your loan but you can access the funds easily so your cash flow is never tied up.
An offset account isn’t for everyone though so it’s important to understand how to get the most out of it.
How is it set up?
If you’re buying the commercial premises as well, many business owners choose to have an offset account as added feature on their commercial property loan.
The reason is that the funds deposited in the offset are for their business cash flow and, while it sits in the linked account,it actually offsets the interest on the property loan.
For example, if you have a $200,000 business loan and you have $20,000 in the offset account, you only pay interest on $180,000!
What if you just need a business loan?
If you just need business finance for start-up or working capital, it will still need to be secured by equity in a residential property that you own.
So you can still get an offset account and reduce the interest payments on this loan amount.
How do I qualify?
It’s very common for banks and lenders to offer an offset account on their business loan facilities.
It really depends if you want a basic package or pay the costs of having the extra bells and whistles of a professional package.
As a general rule:
- Annual or monthly account-keeping: Varies between lenders and some will waive the fee depending on how much you’re depositing into the account on a monthly basis.
- Transaction fees: Some lenders don’t have any transaction fees at all or a few fee-free transactions.
- Minimum amount in the offset: $5,000.
- Minimum withdrawal amount: $1,000.
This is just a general guide only!
Please speak to one of our mortgage brokers on 1300 889 743 or complete our free assessment form and we can let you know if you qualify for an offset account
How will it benefit me and my business?
You can save money!
Using the example of a $200,000 business loan at an interest rate of 9.00% over 10 years, let’s say you kept at least $20,000 in the offset account at all times.
Based on this amount alone, you’d save almost $87 per month in interest payment or $1,044 per year!
It’s better than putting it in a savings account
Let’s say you had a good couple of months and managed to save up around $10,000 in personal savings. Should you keep it in the savings account or deposit it into the offset?
In this example, the savings account is paying 2.7% in interest per annum.
On the other side, your $100,000 business loan is charging 8.00% in interest per annum on a 5-year term.
If you were to leave the $10,000 in savings, you’d earn around $22.50 a month in interest.
However, you’re still paying $360.97 per month in interest on the business loan.
So you could either save $360.97 per month tax-free or earn $22.50 in interest.
Wait, it’s tax-free?
Yes! Even if you had those extra funds in a high-interest savings account, you’d still have to pay tax on any interest earned.
The other benefit of the offset is that, like a savings account, you can still access that available cash flow if and when you need it.
This is much better choice than a term deposit in which your savings can be tied up for a number of years before you can withdraw.
It’s like having the best of both worlds!
Easy access to your funds
You can easily access your funds via:
- Internet and mobile banking
Some lenders even offer packages where the offset account is linked to an overdraft facility so you can manage your finances and pay your bills easily.
Should I just make extra repayments instead?
It’s important to consider whether paying the extra cost of having an offset account is worth it for you and your business.
If you’re going to be using the offset account on a regular basis for business cash flow, you won’t be offsetting much interest and you might actually be better putting those minimal extra funds that you have on hand straight onto the variable component of the business loan.
In that way, you’re actually paying down the business loan rather than just offsetting the interest.
It’s the fact that you have such quick and easy access to your offset account compared to a redraw facility that should determine whether you can actually use the offset account effectively.
Of course, in the world of business where it often makes sense to have quick access to extra cash flow when you need it, having these funds in a redraw facility can be a hindrance.
That’s because with some lenders you may be limited to only making a few withdrawals a year, you may be charged a significant fee each time you withdraw, and you may be required to withdraw a significant minimum amount each time (upwards of $5,000, in some cases).
As an everyday business transaction account, an offset is often a better choice rather than redraw, which you should really only be accessing in emergencies.
Sit with your mortgage broker and get further advice from your accountant to determine what’s best for you in managing your business finances.
Would you benefit from a business offset account?
Call us on 1300 889 743 or fill in this free assessment form to speak with one of our business loan specialists.
We can help put together a business loan package with the features you need so you can best manage your finances and get on with running your business.