Jenna Ford & Albert Waldron
Anyone who has ever been involved with a small business will tell you that the hardest part is getting the time to step outside the business and look back inside at the way things are being done. Unfortunately for most people involved in a small business the daily effort of keeping the business going in the current economic environment leaves very little time to find ways of doing things more efficiently than the competitors.
It is no different for many Chan & Naylor clients who start out in small business on a modest budget and find as the business grows that there is very little time to step back and review the businesses lending requirements. Over time the business finances become a profit leaking sieve.
This month we look at Andrew’s * situation, a typical client who came looking for ways to improve the efficiencies of his business.
Andrew* has been in business for the last 10 years and is running a very successful plumbing and plumbing supply business. He has been able to purchase the premises he works from and has several employees and two commercial vans. He is also the distributor of several exclusive plumbing products that he imports directly from the manufacturer in Indonesia.
As the business has grown Andrew, like many of our clients in business, has ended up with a mixture of credit facilities including; loans for inventory and plant finance in the form of loans for the shelving in the warehouse and a second hand forklift. There were several leases for the office furniture and computers. As each credit facility has been layered into the business the creditors have been able to dictate the lending terms. It was obvious credit interest was depleting the business cash flow more than it should have been. In addition there were complex arrangements of fixed and floating charges over business income and assets and even the warehouse had been involved as security.
In summary Andrew*, had a loan of $270,000, secured against business premises, a commercial unit which was purchased nearly 7 years ago, a business loan of $100,000 taken out 3 years ago to fund business expansion which was also secured by the business premises. He had a small working overdraft of $50,000 which had been set up over 10 years ago when Andrew first started the business. With the current income cash flows of the business it was proving to be insufficient and it was fully drawn to the limit and in some months was incurring penalties for being over the agreed limit. With the two trade vehicles Andrew had taken out two chattel mortgages totaling $70,000, which upon further investigation revealed that the lender had put in place a Fixed and Floating charge over the business income and its “unencumbered business assets”, and against the commercial unit. The result was that Andrew had ended up with all his eggs in one basket (one lender) and had very little flexibility in how he could negotiate future credit facilities should he need them.
His monthly payments, including ongoing administration costs for the facilities, came in at approximately $5,400 plus $1,300 for vehicle finance.
The monthly payments for business credit facilities are set across a much shorter term than residential loans and with commercial interest rates being higher than residential interest rates they will have much higher monthly repayments than a normal residential style loan.
In untangling the mess created by this business credit structure it was possible to refinance some of the liabilities to a residential style product with a longer loan term and lower interest rates. This reduced the monthly interest costs to $2,626 which is less than half what Andrew had been paying. It also meant we were able to put in place an additional $50,000 which took much of the cash flow constraints out of the business.
With the vehicle finance we identified that if we paid the facility out in total that there would have been hefty exit penalties, and, as a result Andrew* decided to leave the two vehicle loans in place for a further 24 months until payout exit fees were more reasonable.
Andrew* then used $2,000 per month of the interest payments saved by the restructure to pay down the outstanding balance of one of the new loans. Over the next two years Andrew is planning to use these extra funds saved as redraw to help fund the purchase of two new work vehicles when he upgrades the current ones.
With the restructure we were also able to have the Fixed and Floating charges lifted from his business. Also the personal guarantees that Andrew had given was removed. Andrew* now has a greater level of control over his business credit facilities.
Importantly, very few residential lenders will accommodate business lending at residential rates. However, it can be possible to restructure your lending to utilise equity available in property to refinance commercial and restructure business facilities to far more flexible arrangements and at competitive interest rates.
If you would like the opportunity to improve the cash flow in your business and untangle your commercial lending mess. Why not contact us and let’s see what is possible for you?
The first step in our process is the “Preliminary Assessment” to understand your current financial position, your future goals and to ensure we can assist you.
Once the initial assessments are completed, we can then discuss whether we can provide better options to achieve your goals.
Please contact our team of Lending Specialists at Chan and Naylor Accounting & Wealth Advisory Group for your obligation free Preliminary Assessment and find out what we can achieve for you.
*All names have been changed to protect client confidentiality.
Jenna Ford & Albert Waldron – Finance Strategist’s & Partners