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

“to err is human; to forgive, divine”: Protecting your credit file, more important than ever.

What do you know about your credit file? Do you know what credit providers you currently have?

You probably haven’t heard of theNational Consumer Credit Protection Amendment (Mandatory Comprehensive Credit Reporting) Bill 2018″  but from the 1st of July 2018, paying your bills to credit providers on time will be recorded on your consumer credit file.

Equifax The consumer credit information section includes:

  • Details of credit enquiries that have been made on you when you have made an application for consumer credit. Consumer credit relates to loans for household or family purposes as well as for the purchase, renovation or re-financing of a residential investment property. Obvious types of credit include credit cards and loans like mortgages, personal and car loans as well as credit contracts such as telephone, electricity, gas and internet. Other forms of credit include interest free store finance and store cards.
  • Consumer credit liability accounts – this is an account that you currently have open or may have had in the past. It includes the type of account, the open and/or close date as well as the credit limit.
  • Monthly repayment history on credit accounts such as mortgages and credit cards. This reflects whether you have paid the minimum amount required on time each month or not. Please note that not all credit providers supply repayment history information to credit reporting bodies like Equifax
  • Overdue accounts such as defaults and serious credit infringements
  • Public record information like:
    • Court judgements
    • Directorship details
    • Proprietorship details
    • Bankruptcy, debt agreement and personal insolvency

Commercial credit information

  • Details of credit inquiries that have been made on your for commercial credit. Examples of commercial credit include a mobile phone contract or credit card for business use or a business loan.
  • Details of any overdue commercial credit accounts and other debts.”

Currently, it is stated only the timeliness of mortgages credit card repayment information will be recorded, however it appears this is due to the technical capabilities of other credit providers. Additionally, other organisations such as the ATO are keen to use this mechanism as tool to collect on debts.

Why does this matter?

Simply, your ability to access credit and at what interest rate you will pay.

Alexander Pope’s Essay on Criticism states “To err is human, to forgive divine” and the first part of this quote certainly rings true of all of us and in our increasingly automated and digital world the risk of error (late payment, incorrect billing etc) has increased. As for the forgiveness, there is no divinity in debt and naturally a credit provider will raise interest rates when they see increased risk.

So although, on the surface it appears to reward good payment behaviors failing to live up to these behaviors will have serious consequences on your standard of living. Typically, this will happen when you need support the most, for example an extended period of unemployment or illness or injury to you or a loved one.

Here are some suggestions to assist:

  • Don’t let debt (bills) get out of hand.
  • Take action immediately, don’t let it get to credit reporting stage.
  • Create a personal budget and review it every month.
  • Know exactly what your credit terms are, and who provides it.
  • Know exactly when all payments are due and what their terms are.
  • Sign up to a monthly credit reporting agency and check your file. Question any organisation that has accessed your file immediately.
  • Ensure all your private information is safe and secure.
  • Keep a list of all your providers, and have a plan to notify of change of billing when required.
  • Think about a savings plan for emergencies. Like all emergencies, Are you prepared? What do you do? Where do you go?
  • Ensure your income protection is updated so that it is still relevant, timely and will cover what is needed.
  • Do your homework and if necessary seek financial advice before applying for credit.
  • Know your rights, including privacy rights.

If you would like to speak with us further, please contact the office to make an appointment.

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.