Availability of Debt in the SME Environment. The trends, themes, and considerations

  • Reading time:7 mins read

Often it is said that being self-employed means that getting finance from a bank is difficult. How funny (and frustrating) that the people that you employee as PAYG employees, whose salaries, bonuses, commissions, and superannuation you are paying, can easily get a loan from a bank and that you are either rejected or are dragged through numerous hurdles to get a home loan. Why would this be the case?

Most of the time it is because you’re dealing with the wrong bank as there is a material difference between how one bank views a business owner when applying for a home loan / commercial loan than the next bank. If you walk into Bank A at 9:00am in the morning, and then Bank B at 1:00pm in the afternoon on the same day, the response you receive can be chalk & cheese.

Points of differentiation from bank to bank;

  • Is your business and the industry you work within a “high risk” industry for this bank, which can result in restrictions / additional requirements?
  • Is your business and the industry you work within a “specialised industry” for this bank, which can result in special offerings and exceptions?
  • Does the bank use your most recent financial years’ profit when working out your serviceability or do they average your income over the last two financial years?
  • Does the bank use the company’s net profit, or do they only use the salary that you draw out and pay yourself?
  • Does the bank factor in any company loans (credit cards, car loans, business loans) into your personal serviceability for a home loan, or do they disregard these commitments as they are looked after by your business (and not you, personally)?
  • Does the bank add back non-cash expenses such as depreciation / amortisation?

Case study #1 - Start Up

  • Scenario: Tech Start-Up founder, 3 years into the new venture, wanting to access equity in their existing property portfolio to re-invest. She was being paid a consistent $300,000 salary for the last 12 months from the company however the company is making a loss.

     

  • Typical Hurdle: As a majority shareholder in the company, banks were factoring her $300,000 salary however deducting the $600,000 loss the company was making which meant she had “negative income” for servicing.

     

  • Catalyst Solution: Sourced a lender was happy to rely on her $300,000 salary only, based on providing pay slips + YTD income statement + last 6 months salary credits. The bank did not need to factor in any of the company financials or performance. This was funded by a Big Four Bank.

Case Study #2 - Scale Up

  • Scenario: Client has started his own business. The first year of operation was not profitable, however the follow year generated material profit. He wanted to refinance, access equity, and buy another property.

  • Typical Hurdle: Banks would want to see 2 years of profits to use income for servicing. On top of this, if the profit for the second year was more than 120% compared to the year before, they would cap the amount of income being used.

  • Catalyst Solution: Sourced a lender that was comfortable in using one year’s income in isolation for the company, providing detailed commentary around the business, the startup costs, and the business strategy going forward. This was funded by a mid-tier bank.

Case Study #3 - Mature Business

  • Scenario: Established business, operating for over 15 years, running three different premises, wanting to expand their property portfolio. The business has multiple leases for their equipment and motor vehicles.

  • Typical Hurdle: Even though the company pays for the business liabilities, all Big Four banks will factor these repayments in to the personal servicing calculation.

  • Catalyst Solution: Sourced a lender that did not factor in the company liabilities into the servicing equation. Borrowing capacity was $900,000 higher than their existing bank. This was funded by a mid-tier bank.

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About the Author

Stephen Michaels

Managing Director | Catalyst Group
Catalyst is a multi-award-winning advisory business. As Catalyst’s Managing Director, Stephen and his team are responsible for all Residential Real Estate Lending transactions (purchasing, refinancing, constructing), servicing High Net Worth’s, Expatriates, Business Owners, and Professionals alike.