Home attached to your business? Better read this

Cross-posted from mybusiness.com.au

An insolvency specialist is warning business owners to be alert to the risks associated with falling property prices, given the family home is often used as security for business finance.

Trent Devine, a partner at Jirsch Sutherland, suggested that the huge boom in values – particularly on Australia’s east coast – has helped many businesses stay afloat by dipping into equity. But this strategy may now come back to bite them, amid a backdrop of falling property prices and banks hiking interest rates.

“Any business that has used personal finances for business borrowings is at risk,” said Mr Devine.

“In the past, when times were tough, struggling businesses have been able to lean on the equity of their home. Now, with falling house prices and other factors, this can have a disastrous knock-on effect for businesses.

“As property prices continue to fall, there is reduced levels of equity with which to finance or prop up a business.”

According to Mr Devine, a key risk for business insolvency is an “ill-advised link” between personal and business finances. Yet this is often unavoidable for new businesses.

“SMBs often use the same bank for the business that they use for personal banking, therefore they’re likely cross-collateralised,” he said.

“They may have their mortgage and business loan with the same bank. They don’t separate one from the other.”

This situation makes it much easier for the bank to assess the health of the business owner’s finances and make much earlier decisions on whether to push for insolvency.

“Rises in interest rates and resulting mortgage stress can certainly flow onto businesses as we’ve witnessed over the past 12 months. If a business is struggling, banks might now note that there’s now no property to support that business because the mortgage is under stress. Clearly, this means that business insolvency becomes a strong possibility,” said Mr Devine.

He urged business leaders to protect themselves by separating business and personal finances.

“Use different banks for business and personal uses so that cross-collateralisation is not an issue. If you are utilising personal funds, perhaps a secured loan to the business rather than opting for a capital injection might also be an option,” he advised.

“Also, business owners who are looking to refinance to help fund their business’ cash flow might find this difficult because of falling house prices.

“When first setting up a business, money can be incredibly tight, but it’s important for business owners to take the time and speak to their accountant or adviser to get the most appropriate advice. Options do exist and it’s important to explore them or risk losing everything.”

Mr Devine’s comments come after property data firm CoreLogic suggested banks are only exacerbating the housing downturn by raiding home loan rates, meaning the current lull in most mainland capital cities will linger for longer.

Latest figures from the firm show that prices have fallen by 5.9 per cent in Sydney over the last 12 months, and by 2.5 per cent in both Melbourne and Perth. Melbourne has also overtaken Sydney as the city with the fastest falling home values, down by 3.8 per cent so far in 2018, compared with Sydney’s 2.7 per cent slump.

Hobart is currently the nation’s star performing market, posting double-digit price growth over the past year.

We believe that Accountants are central in advising people in making sound business decisions, if you would like to discuss this matter or any other matter please contact us on 03 9846 6542 or email info@townshendassociates.com

Is optimism bias ruining your investments?

An insightful article by Candice Chung from In the black. We often forget that scientific theory is applied and is the basis of over decision making, enjoy.

Anyone who has ever signed a gym contract, attempted an alcohol-free month or jumped headlong into an elaborate new hobby has felt the rush of adrenalin the moment they take the plunge. At the precipice of each decision, we have a tendency to picture the outcome with unwavering optimism, despite what previous mistakes should have taught us.

This is what makes us underestimate the likelihood of experiencing negative events such as falling ill, divorce, or misjudging the risk of losing money on an investment.

“Optimism bias is the human tendency to believe that things will turn out better than they will,” says Andrew Macken, chief investment officer at Montgomery Investment Management. “It’s entirely common – even among those who are aware of it.”

Recent research by Dr Tali Sharot, a neurosecientist at University College London, found that up to 80 per cent of people are afflicted with the bias. What makes it uniquely dangerous – especially when it comes to key financial decisions – is that we often look through rose-tinted glasses.

“We’re optimistic about ourselves, we’re optimistic about our kids, we’re optimistic about our families, but we’re not so optimistic about the guy sitting next to us,” Sharot says in a TED Talk.

While we’re quite capable of appraising other people’s situations with objectivity, or even cynicism, Sharot found that optimism about our personal prospects tend to remain curiously persistent.

“It doesn’t mean that we think things will magically turn out okay, but rather that we have the unique ability to make it so.”

The downside of optimism

As humans, we are poor predictors of our future. While our ability to imagine a brighter version of today is what drives us to seek change, the same habit also exposes us to unexamined risks, sometimes with disastrous results.

“On a day-to-day basis, optimism bias affects our risk profile,” says Clare Goodman, neuro leadership specialist and director of insights at consulting firm The Why.

“Overestimating the upside of financial or business decisions can encourage us to leap to decisions that may not be thought through,” she says.

“Underestimating the negative possibilities can lead to a Pollyanna approach to financial decision-making, or the tendency to remember pleasant events more accurately than unpleasant ones, leading to reckless behaviour. Critical thinking and the ability to see possible issues is valuable. It enables a manager to adapt and adjust strategies throughout [a] project.”

Essentially, a blindly optimistic view can be as problematic as a consistently underinformed one.

Goodman cites the 2008 global financial crisis (GFC) as a classic example of how optimism about the inevitability of financial growth on a mass scale can lead to disaster.

The same applies to companies where executives are disproportionately optimistic about their company’s future, compared to the views held by employees.

“This gap between a leader’s expectations and vision and the workers’ experience causes significant problems,” Goodman says. “Organisational cynicism can grow, which often impacts discretionary effort, motivation and willingness to change.”

How to avoid optimism bias

To avoid the trap of optimism bias, here are some questions we can all ask ourselves to sense-check decisions, according to The Why’s Clare Goodman:

  1. What are you trying to achieve with a particular financial decision?

  2. What can you afford to lose?

  3. What key things need to happen for it to succeed, and what will be the consequences if they do not occur?

  4. What would be an early warning signal that a decision is on or off track?

  5. What are your plans B and C?

What it’s worth?

Value as a topic is fascinating and all of us need it, use it and perhaps earning a living measuring, selling or consuming it. So diverse and complication that I could not possibly write a complete nor accurate depiction of value pleasing everyone. It is a concept which helps defines us as a civilisation and has caused the break up of many others.

In the 17th Century, when financial markets as we know them today started to take shape, a French nobleman named Francois de La Rouchefoucauld wrote:-

“The greatest of all gifts is the power to estimate things at their true worth”

I have it written on a pink post-it note and it holds pride of place at my desk, in the world of accounting and financial planning this is not just an inspirational quote summarising my own perceived contribution to the world but is a sage warning.

As most finance people will tell you we tend to over and underestimate things quite regularly and we live in a world where it is increasingly getting harder. This is especially true since the global financial crisis and with advent of quantitative easing.

Typically, we attribute concepts such as usefulness and utility to value. From this we can get to markets of supply and demand and in a simplistic way the markets will determine the price.

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The average life span of a average desktop is 3 to 5 years Source: CNET , 2008 ” What is the Average life of an Average Desktop computer?”

Then this happened.

I remember several years ago now, an auctioneer coaxing bidders to bid more with “Come’ on money is cheap!” and from one perspective this is correct and it appears we are now confessing that this “cheap money” was the primary reason for inflated assets. The problem this creates for the individual decision maker is “does the price reflect true supply and demand?”.


We shall find out in the coming years, however there are a few other ways to judge value which can be useful.

Firstly, value can be assessed by what direct and indirect benefits and costs occur, as our previous blog Thoughts on stopping you from a business failure  suggests, that means figuring out your cash flows and what your plan is.

Secondly, understand the time value of money and what that means to you. A dollar today is always worth more than a dollar tomorrow and by way of implication that may means judging value by what price you would receive if you need to have it sold by the end of the week.

Finally, pay attention to both sides of the argument and be informed when making a decision. Accountants and to a lesser extent financial planners can make a significant contribution in these decisions and assist you in navigating such decisions.

In today’s world being well informed and having a balanced judgement will assist in you in making the right for you.

General Advice Warning

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on the author’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.





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