We have talked in the past about our view that we are moving into a tighter credit environment in which bank lending guidelines will become stricter. We also talked about challenges existing borrowers are having with annual business loan reviews and extended interest only periods. I am less than delighted to announce that for once our predications have come to fruition. \u00a0Daily feedback from borrowers suggests that times are indeed becoming challenging both for new borrowers and for existing operators.<\/p>\n
To be frank some of the concerns raised with us are of the borrower\u2019s own making and reflect a lack of understanding of the terms and conditions of the loan. \u00a0In many cases we have been able to offer guidance around a better understanding of loan condition compliance and offer borrowers a few helpful tips to manage their bank relationship better.\u00a0 For our own clients we offer to manage the relationship on behalf of the borrower which can reduce the stress levels somewhat. \u00a0A problem shared is a problem halved so to speak.<\/p>\n
Here\u2019s what we know for sure.\u00a0 The majority of business loan borrowers are going to be subjected to an annual review of their facilities. The borrower\u2019s ongoing capacity to meet their obligations and the value of the bank\u2019s security are usually inextricably linked to the performance of the business. \u00a0As such it should come as no surprise that the bank will seek copies of your most recent financial statements. By most recent we mean very recent, not your tax returns lodged 12 months ago. \u00a0This may well mean that you need your accountant to prepare end of financial year financial statements even if you don\u2019t intend to lodge your returns for months. \u00a0I hear people say what an impost this is. \u00a0I say that if you have got to the end of the financial year without preparing draft financial statements as part of pre June tax planning you need to take a serious look at how you are managing your financial affairs. \u00a0I suspect your lender will take the same view. \u00a0Nothing strikes fear into the heart of your bank manager like disorganised financial reporting and the possibility of ensuing dramas with tax planning and provisioning!<\/p>\n
A word of caution on simply dropping your financial statements on your bank manager\u2019s desk. Going concern businesses such as management rights and motels are bought, sold and valued on adjusted net profits. Your tax returns will seek to minimise that profit as best and as legally as you can.\u00a0 It\u2019s important to ensure that your lender appreciates the difference and assesses your annual review in a balanced manner. \u00a0Comparing an unadjusted set of financials designed to minimise your tax with the P and L you bought on and valued on can be a recipe for disaster if not managed and presented appropriately. \u00a0Again, we do this for our clients if they wish.<\/p>\n
Your lender will almost certainly ask for some supporting information when conducting the annual review. An up to date statement of assets and liabilities is a definite and in most cases so is confirmation that all your tax obligations are up to date. \u00a0We believe in getting on the front foot and also providing your bank with any good news stories that will assist in keeping the lender in a state of happiness. \u00a0If you have an agreement top up, lease extension, units coming into your letting pool, new accommodation contract or wonderful Trip Advisor reviews tell your lender.<\/p>\n
And now, onto another challenge. \u00a0It may be that your loan is not coming up for review but for expiry.\u00a0 This is a much more serious matter than the annual review of a loan and we have previously written about the potential perils of short term finance. \u00a0Some lenders, in order to offer lower interest rates, make relatively short term funding commitments to their clients. The Letter of Offer says loan term 3 years.\u00a0 Many borrowers wrongly assume this is the interest only period and the loan will automatically roll on.\u00a0 Not so.\u00a0 If the loan term is 3 years then all bets are off after that period. \u00a0In essence you reapply for your loan and there is no obligation on the bank to extend the loan term. \u00a0It is imperative that you have your loan term expiry diarised and ensure you have all necessary information in front of your bank in time for them to reapprove the loan, revalue the business and other security and issue a new Letter of Offer. These days that\u2019s no less than a month prior to the loan expiry date.\u00a0 If you miss the expiry date the bank can, at its discretion, extend the loan term to give you time to get yourself organised but it\u2019s not a good look and best avoided.<\/p>\n
Regardless of loan review and\/or expiry triggers more and more banks are taking the option of revaluing security more regularly.\u00a0 Remember, your bank retains the right to revalue as and when they see fit and it\u2019s at your cost.\u00a0 Again, get on the front foot with an adjusted P and L for sale purposes and some recent market sales evidence and potentially save yourself thousands.<\/p>\n
So, what\u2019s the end game here?\u00a0 Frankly we make money when people borrow and use our services. That includes refinancing so I guess we should be big fans of that strategy.\u00a0 Not necessarily. \u00a0All things being equal you have likely developed a relationship with your bank, met your obligations and built trust and some rapport.\u00a0 There\u2019s value in that relationship and like a marriage it\u2019s worth working at, even if there are occasional rocky patches from time to time.\u00a0 However, when the time is right it\u2019s certainly worth at least taking a look at the competitive landscape to see what else is on offer and to ensure your lender is looking after you. \u00a0In my mind the time to do this is at annual review or loan expiry. Your bank will review you and I think you have every right to review the bank. \u00a0You have gone to the trouble of preparing what amounts to a loan application (or we have done it for you) and in many cases you have an up to date valuation. It takes little extra effort to use this data to see what other lenders might offer and to compare your existing arrangements. \u00a0At the very least you will be equipped with some bargaining power and at the other extreme you will have options if your current lender drops the ball. \u00a0Our end to end process manages all this for our clients fee free (shameless plug !)<\/p>\n
Right now, the single biggest motivator for people moving banks is the imposition of P and I loan repayments at the end of interest only periods. There are numerous reasons why borrowers like interest only and just as many reasons why lenders don\u2019t. We have developed strategies for negotiating extended interest only terms or at least reducing the burden of full P and I repayments and we are happy to share these with clients.<\/p>\n
A word of warning.\u00a0 Debt service tests are becoming ever more stringent and the hurdle you met 3 years ago may well be a leap too high in todays closely regulated financial environment.\u00a0 If you are asking for interest only finance, you need to have a good reason.\u00a0 Preserving cash flow for good wine, fast cars and fun times resonates with me but will almost certainly leave your bank manager less than excited.\u00a0 There are any number of perfectly good financial reasons to use interest only finance so best to use one of those instead.<\/p>\n
Finally, and just to clarify because I know the managing director will ask. \u00a0No, I don\u2019t advocate taking a look at the competition to see what\u2019s on offer if your marriage is getting a bit rocky. In my case that could prove fatal!<\/p>\n
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We have talked in the past about our view that we are moving into a tighter credit environment in which bank lending guidelines will become stricter. We also talked about challenges existing borrowers are having with annual business loan reviews and extended interest only periods. I am less than delighted to announce that for once our predications have come to fruition. \u00a0Daily feedback from borrowers suggests that times are indeed becoming challenging both for new borrowers and for existing operators. To be frank some of the concerns raised with us are of the borrower\u2019s own making and reflect a lack of understanding of the termsRead More →<\/a><\/p>\n","protected":false},"author":1046,"featured_media":1259,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mbp_gutenberg_autopost":false},"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts\/1258"}],"collection":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/users\/1046"}],"replies":[{"embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/comments?post=1258"}],"version-history":[{"count":1,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts\/1258\/revisions"}],"predecessor-version":[{"id":1260,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/posts\/1258\/revisions\/1260"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/media\/1259"}],"wp:attachment":[{"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/media?parent=1258"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/categories?post=1258"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/theonsitemanager.com.au\/news\/wp-json\/wp\/v2\/tags?post=1258"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}