If you are seeing zero interest expense on your Opportunity's financial statement, it is likely that your bank has chosen to include capital in their funding cost. Consider a 5-year commercial real estate loan for $1 mil with an interest rate of 2%. The orange bar in Andi®'s pop-up at the bottom of the screen indicates that the tax-adjusted cost of funds exceeds the ROA and that equity funding will be used.
These types of loans are usually undesirable. However, within the context of a specific customer relationship, it may make sense. In these situations, PrecisionLender calculations assume that loans, where the tax-adjusted cost of funds exceeds the ROA, are funded with equity and not borrowing. This results in a zero interest expense on the corresponding financial statements and an average loan balance equaling the average equity balance.
Now supposing the ROA increases as a result of a higher rate or added fees. When that ROA is no longer lower than the cost of funds, PrecisionLender assumes the loan will use external funding. You will notice that the Interest Expense is no longer zero. As a result, the Net Income will be lower than it was without the fee, therefore generating a lower return.
PrecisionLender's recommendation is to not include capital in funding. Please see Should I Include Capital in my Funding Cost? for more information.
