29 May The great lending myth
A few weeks ago we shared an article on Facebook that was all about what happens to businesses when the bank says “no”. According to the article, one in four SME’s reports being rejected by banks and one in three claim they had to resort to borrowing from friends or family, or used credit cards to fund their business requirements as an alternative. You can read the full article here.
We think that’s a terrifying concept that’s bound to end in disaster. Read on to find out why a short term loan makes more sense for both your wallet and you business.
So why does the bank say no?
Lots of reasons, many of which may not make logical sense.
We often hear stories of clients who have banked with the same bank for actual generations with excellent account conduct and a valid reason for requiring short term funding who are turned away with a blanket “it’s not within policy” explanation.
Policy restrictions, postcode restrictions, restrictions on what type and size of land is acceptable, zoning restrictions, a bank-deemed unworthy reason for borrowing, restrictions around acceptable LVR, issues with your credit history and the list goes on.
Realistically, the bank doesn’t have to lend you money if it doesn’t suit their purpose.
Unfortunately, that doesn’t help you.
From a borrower’s perspective, bank funding may not actually suit your immediate needs.
Bank funding is great, but it’s not the be all and end all. With lengthy application processes and long processing times bank funding may not be able to meet your required timeline for cash. Say you have an opportunity to purchase a commercial property at auction with a 7 day settlement (happens more frequently than you might think…), you don’t have time to wait 4 weeks for your application to be ‘assessed by credit’. You need cash and you need it now.
In a lot of the cases we see borrowers who aren’t in a position to supply their financials, pay high application fees or provide additional security to meet the requirements of their bank.
Sometimes your reason for requiring a loan isn’t seen as valid or acceptable by the bank. For example, ‘cashflow’ is no longer an acceptable purpose for requiring finance.
The risk of borrowing from family and friends:
Your friends and family are people who love you, they want the best for you and want to see you succeed. There can be occasions where you are experiencing a cash shortfall in your business and you think – “oh, I’ll just ask Mum/Uncle Jim/Best friend Bobby for a few thou to tide me over”.
Hmmmm no. Most likely your *insert loving family member or friend* will say “sure thing, pay me back when you can”.
But what if you can’t. What if your shortfall couple of thousand is really an unrealised shortfall of $200,000? Are you going to return to that friend or family member to ask for help covering that amount?
Personally, I wouldn’t put my loved ones in that position.
Here’s a few things to think about before you approach the ones you love:
From the borrower’s side:
- Your lender may have to ask you repeatedly for repayment making for an awkward time around the Christmas table
- perhaps your lender might need the funds back quickly, can you repay them immediately if they need it?
- you might get your knickers in a knot if they say ‘no’
- they may ask for a contract to be signed, or a credit check to be completed
- can cause a shift in the dynamic where the you feel obligated to the lender in all things
- it could ruin your relationship forever…..
From the family/friend side:
- funds borrowed once might be assumed can borrow again
- you aren’t earning any return on your funds
- if they are borrowing from you, chances are the bank won’t lend them any cash – possible red flag
- you could feel pressured into saying ‘yes’
- you may not have the available funds but feel obliged to help out anyway putting yourself at risk
- repayment of the loan may not be the priority as the borrower might expect they can pay it back at their leisure, with no interest and no penalty for non-repayment
- most importantly, you aren’t supporting the borrower’s ability to create good lending and business habits for themselves. You have become an enabler.
The risks of using credit cards for financing:
Credit cards are a first world convenience that comes at a cost.
While they have their place in the Australian lending landscape, credit cards don’t create long-lasting financial discipline, they are a tool, created by financial institutions used to condition you to spend. You start believing it’s your money, available to spend at your leisure – it’s so easy to just delve into your pocket and whip out your plastic to spend whatever you want on whatever you want with no requirement to repay it ever, really.
The mindset is: so long as you make that minimum repayment, you can go to town.
Credit cards aren’t generally used to buy appreciating assets. Often things like the electricity bill, office consumables and petrol are popped on the card. This is an issue twofold, firstly, you have nothing tangible to sell should you find yourself debt-stressed, and secondly, you are likely paying interest on those purchases. That amazing 4c off offer at the Woolie’s servo isn’t looking so crash hot now….
The other thing to consider before you flash that fantastic plastic, is that this is a revolving line of credit with no fixed end point, no set repayment requirement and a rate that can rise at the whim of the lender. A short term loan will remove the temptation to keep spending once you have made your purchase and provides a fixed rate for the term of the loan so you know from the outset what your costs will be.
Minimum repayments won’t pay off your debt in any sort of timely fashion. In fact, according to ASIC’s Money Smart Credit Card Calculator using a $5000 balance and a middle of the pack rate at 15%, making only the minimum repayment would cost you a totally of $12,030 and would take you 23 years and 10 months to pay it off. Nearly 24 freaking years. No thanks. The calculator also shows you what the same scenario would look like if you made more than the minimum repayment per month. Use the calculator to have a play around with your own credit card balance to see how you can rid yourself of it for good.
The risk of the balance transfer
Ever seen those special deals, “Balance Transfer – 0% for 12 months”
(don’t notice the fine print that states that after the initial 12 months the interest rate will revert to 24% for the whole balance).
Here’s what happens in a lot of cases.
- Rack up debt on credit card one
- Balance transfer for 0% – woohoo, let’s forget about that debt for a few months (say, 12?)
- Keep spending on card one
- 12 months is up, full balance on card two is being charged interest, card one is maxed out again, let’s balance transfer to our new shiny card three
- Rinse and repeat
In the end, you have multiple cards, with multiple debts, a whole lot of reporting on your credit file and very few options when your business needs cash. (If you are in this position, please give us a call. We can help you to get rid of this debt once and for all. 1300 668 551)
We need to talk about fees.
Credit cards come complete with a raft of fees, some of which (if like the rest of the population you don’t read the pages of T’s & C’s…) you may not be aware of until they hit.
There is the standard annual fee which can be as low as $0 and as high as $1750 (yep, for the Amex Business Platinum Charge Card!!)
Some you might not be aware of could be:
- cash advance fees
- foreign transaction fees
- late payment fees
- over limit fees
- I could go on……
Rewards points do not maketh a good deal.
Rewards points encourage you to spend more to earn more points. The harsh reality of rewards points is the incredible amount of money you have to spend in order to earn the ‘reward’. I picked the top listed card at Mozo just to see how much I’d have to spend in order to earn a flight from Sydney to London at 120,000 points. After my $299 Annual Fee, I would be spending $10,000 per month for a year to earn that flight. $120,000 spent to ‘earn’ a one way flight to London. That is just pure spend too, that doesn’t account for any interest I might accrue along the way. Does this make sense? Sure, for some people. The ones who pay their balance off in full every month and accrue no interest. Maybe their regular monthly expenses spend is $10,000 per month and the Annual Fee is a drop in the ocean for them. But for most SME businesses, the sums just don’t add up. Equifax suggests that the average rewards credit card interest rate is 19%,
It’s sooooo easy to overspend. All you have to do is tap that plastic card and the goodies are yours. There is a real moment of psychological pause before you hand over physical, tangible cash where you ask yourself “Do I really need this, is this going to help me?”
So, what should you do instead?
- Build an emergency fund – a few thousand dollars in the bank for when the lean times hit, maybe payroll blew out due to stock take, maybe there is a special deal from a supplier. Your credit card is not the answer
- Build a budget – Keep track of your spending and forecast what *might* be on the horizon, add in a buffer
- Look at a short term loan. If you need to cover a cash gap, consider a short term loan (check out the example loan we have just funded below to get an idea of how this could work for you)
- Instead of asking friends or family for a loan, ask them for help. Help to set a budget, or review expenses. Perhaps a family member runs a successful business, advice costs nothing and could mean the world to you and your business.
A recently funded scenario:
Our clients had a commercial loan with their existing mainstream lender secured against their industrial shed. They needed cash out urgently to fund payments to outstanding creditors, including an ATO debt. The bank declined the application because of the ATO debt.
We were able to source and settle the deal within 3 days of receiving the application
2 month term
2% per month
Once the ATO was paid out, the client was then able to refinance the amount with their bank at their standard lending rate.
Why is a short term loan good for your business?
- Quick turnaround
- No financials needed
- Often no valuation required
- Able to do 2nd mortgages
- Fixed rate of interest for a fixed term, you know what your repayment will be and when it’s due
- Repayments clear the debt in full
- Flexibility around term and amount
- Direct access to funders with a more flexible lending criteria
- Ability to move quickly on opportunities as they arise
- Higher LVR’s
- Interest and fees capitalized
- $200,000 – $10m (higher available on application)
- Terms of 1 – 12 months
- Settlement within days of application