Tightened credit conditions for small businesses increases the importance of debt reviews and smart planning.
The 2019 financial year is done and the results are in, but before the financial reporting is locked down, it’s worth considering whether tax minimisation is the only lens to apply. In a tightened credit environment it’s more important than ever for small businesses to be monitoring short and long term debt requirements, and how banks are assessing the financials.
One of the biggest changes to hit small business in recent months is the move by almost all banks to use 2 years’ averaged financials for loan assessment. A number of banks previously differentiated themselves from a policy perspective looking only at 1 year’s, which was often advantageous for growing businesses. Expect to be paying much higher interest rates from a non-conforming lender if the business is under 2 years old. Another blow for small business is the increased scrutiny on depreciation. Many banks are looking closely at depreciation add-backs for income producing assets, or assets that will need to be replaced (such as cars).
The other big change is the emergence of fintech style business lenders who can provide access to fast and reasonably priced unsecured funds, which can be very attractive at tax time. But qualification and rate are largely dependent on Credit History and the provision of business Bank Statements. Rates vary enormously on the type of loan, the expected repayment term and the “result” of the application. But few would-be borrowers anticipate the effect of each enquiry on their Credit History, nor the impact of short term repayments on total borrowing capacity.
Small business owners are also shocked to find that minor indiscretions such these enquiries and late Credit Card payments could rule them out of mainstream funding.
It's not all bleak though. The tightened credit conditions have seen the rise and rise of “non-conforming loans” from non-banks. Lenders such as Pepper, Resimac, Liberty and LaTrobe are increasingly recognised brands, and their products come with a range of policy nuances and interest rate scales. They position themselves as able to put small business “back on track” and tend to take a more balanced approach to minor indiscretions and business funding needs.
To avoid over-complicating and overpaying though, EOFY is the exact time of year business owners need to be assessing their short and long term debt requirements, business and personal, and planning ahead. “In the main, lenders are primarily focused on reported surplus cash, and accountants are expected to minimise it. It creates a natural tension that needs really careful planning”.
For more tips & advice, contact Lanie Conquest at Surf Coast Finance
With over 25 years’ banking & financial services experience, she helps local families & businesses make smart financing decisions.
M: 0418 938 646