Banking Commission Causes Knee Jerk Consequences

 

Those of us who have bought and sold motels over the recent years can certainly remember the frustrations in dealing with the banks with our lending applications.  

Compared to now, those years were the halcyon ones – even in spite of the Global Financial Crisis – notably a function of the greed of bankers – not only those in the USA.

It seems as though there are two diametrically opposing charters running inside a lending application.  A Business Development Manager (We used to call them Sales Manager) keen to add to his book, and typically being told to ‘get out there and sell’.

And a Credit Manager, whose management appears to be promoting an edict of only absolutely rolled gold five star deals being approved, with ‘blood on the floor’ – that of the credit manager - if it all falls over.

We are returning to those days when we would somewhat flippantly and cynically report that so long as you had your own funds to the value of a lending application tied up in a Term Deposit earning 3%, the bank would lend you money at 6%.

On one of my too many days working for one of the four pillar banks, my General Manager remarked that, “It’s easy to lend money in the good times.  It takes skill to lend in the bad ones.”

I’m not sure the word, “skill’ comes into today’s equation.  Fear of consequences would be more appropriate.

And rightly, the Banking Commission is putting the fear of God into the financial hierarchy.    Already the repercussions have seen some of the very high fliers falling on their swords – but not before ensuring the financial benefits they have enjoyed are finalized in an enriching exit.

Trouble is, it cascades down – to even the ‘mum and dad’ wanting to take on a small business and needing a secured loan to do it.

That opportunity is at risk.  We are even seeing the banks patronizing potential borrowers who are unable to secure a loan against their freehold assets that sit in high value real estate.

So……….

What does that mean for the accommodation industry?   One where the average ownership is probably around the four to five year mark, particularly for leases.

(Here’s a little secret to share.  It just happens to be the window where the maximum tax benefits have been achieved – talk to one of Tourism Brokers’ street wise agents to find out more).


What does it mean for a vendor?

Unless your buyer has cash, he will apply for a business loan.

Not twelve months ago, he would probably have conditional approval within two weeks.

A month or so ago, that became four weeks.

Now, we are hearing six weeks.

It means no quick settlement.  If it all happened in 90 days from the signing of contract (and banks are disinterested and hypothetical until this happens), that would be lucky.

I would suggest there is no change out of four months now.

Make sure your books can be understood by a year 10 student, and don’t expect either your business broker or your finance broker to be tricky.

Tricky doesn’t work.  Easily read, easily understood, no surprises books do.   They have to have the KISS flavor about them (Keep It Simple Stupid).

And being easily understood isn’t enough. They have to be ACCURATE.

I recently worked with the leasehold sale of a brilliant motel that was branded with one of the major franchises.  Nothing wrong with that, except that the book keeper for the motel had processed the bottom line debit or credit of the franchise monthly advice and in doing so, reduced the value of the motel sales, which then impacted on the reasonableness of the rent which we know is a percentage of the sales.

Not only that, but the hokery pokery of the franchise dealing with GST confused the operator, denying her a significant BAS claim.

In a Profit and Loss statement, a business broker will look at two lots of addbacks.  The first is known in short hand as EBITDA.  It stands for Earning Before Interest Tax and Depreciation Allowance.  Yes – the banks don’t mind these.

And then there are the lifestyle addbacks.  For example that motor car you may have bought is probably not necessary to advance the business, but it certainly is a great reward for your efforts in running a profitable business, and the tax man certainly doesn’t mind all the financial bits and pieces he gets from your purchase.

The one that is under heavy scrutiny is “Personal Use of Accounts”.   

There appears to be little understanding by credit managers, that motel and caravan park owners do not pay personally for items that are also used in the business.  Generally, our agency has made a modest claim for these added back items – in the order of $10,000.  That’s under $200 per week.

Even the ATO recognizes it in a number of industries.

It’s becoming harder to justify to a lender.  It’s one of the new layers of bureaucratic testing that is now seeking greater evidence of anything being presented, and in a recent application, requiring supporting certification from the vendor’s accountant.

And for purchasers, what are their challenges?

Make sure your application is squeaky clean.  That all the assets showing as such are legitimate and will actually value up to your expectations.  Don’t rely on the bank interview.  Get your accountant to assist.  In the proving system, his signature certainly carries more weight than yours.

Haven’t got onef?  GET ONE!

Be sure that all liabilities are accurate to the day.  That credit card limits are advised. It’s no good ‘forgetting’ that one that’s fully drawn and expecting no one to notice.

It’s no good having been denied credit or having failed credit.  If you don’t think that the banks don’t have a cross referencing file of those who have left domestic or other debt, or other failed lending applications lying around and hopefully forgotten – THINK AGAIN.

And do make sure that the mobile phone bill you never paid ten years ago – the one that got reported to the credit history businesses – is paid and recorded before you or your finance broker even start the process of application.

Maybe a check with those guys advertising credit check results on the telly, would be a good start. Or go back to your accountant.

There is one thing going for you and us.  If banks don’t lend, they don’t make money.  

On the other hand when banks become risk averse, they will make a flight to the safety of the easily proven and relatively risk free home loans.  

There’s not as much thinking necessary.   The opportunity to leverage more through commercial lending to small business is lost in the focus to protect their own jobs.  (At this time career advancement is irrelevant!)



The word for today is VANILLA.

No hokey pokey flavours,  Not one scoop of passionfruit and another of rum raisins.

Just plain vanilla.  To vendor, buyers and brokers I say,

PRACTISE THE WORD




Reg Partington
Sales Executive: Victoria
Tourism Brokers
June 2018