Both property and small business are two areas of the economy feeling the heat as a result of the 2018 Banking Royal Commission. If you own a real estate agency, this can be troubling news!
During commission hearings, it was found lenders including ANZ and Westpac financed small business loans which the Financial Ombudsman later ruled should not have been approved. In one case raised as part of the enquiry, it was reported borrowers were given in excess of $200,000 despite providing unrealistic financial forecasts.
Due to the enquiry, banks are on high alert. They are dotting their i’s and crossing their t’s like never before and ensuring loan approval happens only with correct amount of paperwork and evidence behind them. Now, many business owners are suddenly finding the finance they were counting on is not coming through.
If you’re in the position of seeking a loan, or if you’re considering it to finance a purchase on behalf of your business, you must be adequately prepared. The banks still want to lend money (it’s how they make profits after all) but they don’t want the repercussions of being named and shamed as irresponsible lenders.
How to ‘beat’ the banks
You’re not really beating the banks by being prepared when you apply for a loan. You’re actually helping them! Make their job easier (and improve your chances of approval) by taking the following steps:
Define the purpose of your loan
Before you apply for a loan, you must be clear about what you will spend the money on. This includes sharing with the bank how the money will help you grow your business.
If you are looking to borrow to fund the purchase of a rent roll, you will more than likely be expected to provide forecasts of how this will be profitable for your business.
When you define the purpose as part of your loan application, you should also be able to state exactly how much money you will need. What’s more, it is a good idea to have the type of loan you’re after (e.g. secured/unsecured), the terms you are looking for and the interest rates (variable/fixed/split) in mind.
Be proactive with paperwork
To qualify to be lent money, you have to prove you can pay it back. To do so, expect to be asked to share detailed business records, including:
Accountant prepared financial statements
Profit & loss details
Cash flow summaries & projections
Balance sheets.
If possible, you should have records going back three to five years, to prove your business is stable and on a positive growth trajectory.
Check the forecast
As well as providing information in retrospect, you should work with your accountant to create forecasts for the future. These figures should be realistic and evidence-based, not numbers which you hope to achieve.
Be careful with the taxman
Filing your taxes can be a catch-22 when it comes to borrowing to finance your next move. On the one hand, you want your declarable income to be low, so you owe less at tax time. On the other, the more money your business makes, the more favourably you will be looked on by your lender.
For this reason, it makes sense to work closely with your accountant and lending broker to plan ahead. If you know you want to take out a loan, involve them in your financial decisions and reports so you come across as suitably profitable on paper.
At this tricky point in time, it makes sense to plan ahead and work with the guidance of qualified professionals who understand what the banks are asking for. If you go in well prepared and have a stable business which can prove ongoing income, you will be better placed for success.
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