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Even though your bank may say it is – Finance ain’t Rocket Science
After 25 years of funding plant and equipment of every description for company owners, one thing is clear – the client has already approved the machine purchase in their own mind, they know why they are buying it, what it will earn or save them and the risks involved. Click here to read more
Whether the machine is being purchased to improve the processes, required for additional contracts, or to reduce existing outsourced subcontractor costs, the business owner has already gone through a mental “approval” process or justification behind buying the gear.
All too often this very concept and what it really means is lost on the banks or at least not heard as clearly as it needs to be.
Skin in the game
What is the relative “skin in the game” if it all goes wrong.
For the bank, any default can create a potential loss and the approving officer may be “hind sighted” on the transaction to see if they had made an error in approving the loan on the information initially presented.
For the client, it gets very personal, by that I mean they typically have their personal guarantee on the line and with that an obligation to make good any debt shortfall even if that means their need to sell other assets to clear the debt or face the prospect of bankruptcy.
So, it is fairly easy to see who has the most “skin in the game”.
Good finance is not about jumping through hoops for the bank, it is absolutely about assisting the bank in understanding why the decision has been made to buy the machine how it will be paid for and the defense trenches in place in the event it all goes “pear-shaped”. This needs to be communicated well and into “bank speak”.
If it is not, either a finance approval won’t happen or if it does it will be “roped and chained” far more than it needs to be and possibly to an extent that is not ideal for the client.
Fast Track Finance approvals
We are now seeing a huge amount of finance being done simply based on client profile and behavior where there is no need to provide financial information.
Many assets (vehicles and smaller excavators etc) up to $150,000 are being automatically approved where the client is:-
• 3 years in business
• A property owner (if not a 20% deposit is required)
• A good credit history
This fast-track finance also applies to larger acceptable assets up to $500,000 where the client is about to or has recently finalized a similar debt of say $400,000 where the new payments are up to 125% of the outgoing debt.
Other Finance approvals come down to 3 basic questions
1) Can you afford the payments?
2) If it all goes pear-shaped can you sell the gear and pay out the debt?
3) Have you always honored your commitments (historic finance report card)?
Whether the asset cost is $20,000, $200,000 or $2mil, these 3 fundamentals apply.
It is true that the larger the asset cost, the more detail is needed around these 3 questions, however, these are all in reality simply subsets of these 3 fundamental questions.
1. Can you afford the payments
Does your present trading results indicate you can pay even if the machine being financed does not contribute to any additional income/profit? If no, what tangible savings or additional incomes can be “reasonably” expected?
Are there existing debts that are currently running off which will free up cash to service the new debt or are you spending money on subcontractors which will no longer be the case with the new machine?
Is the R & M cost on the existing gear become so high that significant savings will be made by replacing it?
Has the level of existing and or new work increased to a level where the extra machine is needed?
2. What’s the fallback position if it all goes pear shaped
On the asset exposure side, if a $1mil machine is seen to have a $700,000 auction value, the perceived shortfall exposure is $300,000 on day 1. Lenders can be comfortable with this exposure if they know the client has other equipment which are either wholly owned or have “equity” in them meaning the resale value is greater than their debt.
Similarly, great comfort is obtained where the business owner has good equity in property (either personal or through the business). Let me make it clear here, they are not after a mortgage, simply the “comfort” of knowing the borrower has resources which can assist in paying any shortfall if called upon to do so.
These questions simply address “if it all goes pear shaped can you sell the gear and pay out the debt?”
3. What does your report card look like
Have you always honoured your commitments and not left any financiers or suppliers “bleeding in the alley”, does your Public credit report look fine?
There is nothing complex about the areas shown above, they are in so many ways simply common sense and definitely not “Rocket Science”.
Any savvy company owner has already addressed such matters in their own mind as a function of contemplating the purchase of the equipment. After all they are the ones who are taking the real risk and will suffer the consequences of an incorrect decision.
RECENT EU LAW CHANGES AND PRIVACY UPDATES, WILL THIS AFFECT YOUR BUSINESS OPERATIONS?
The legislation was created to protect online privacy, by making consumers aware of how information about them is collected and used online, and give them a choice to allow it or not.
WHY ARE COOKIES AN ISSUE?
There are other technologies, like Flash and HTML5 Local Storage that do similar things, and these are also covered by the legislation, but as cookies are the most common technology in use, it has become known as the Cookie Law.
All websites owned in the EU or targeted towards EU customers (which includes countries such as Australia and New Zealand), are now expected to comply with the law
WHAT ARE COOKIES ANYWAY?
Cookies are a kind of short term memory for the web. They are stored in your browser and enable a site to ‘remember’ little bits of information between pages or visits.
WHAT IT MEANS FOR BUSINESS?
If you own a website, you will need to make sure it complies with the law, and this usually means making some changes.
If you don’t comply you risk enforcement action from regulators, which in the UK means The Information Commissioners’ Office (ICO). In exceptional cases this may mean a fine.
WHAT YOU SHOULD DO?
Compliance with the EU Law and Privacy comes down to four basic steps:
• Work out what cookies your website sets, and what they are used for.
• Obtain their consent, such as by stating a disclaimer regarding cookies with a tick option for acceptance, thus giving the end user some control.
More changes are currently going through parliament and once passed, we will provide any updates if they affect your business. These will cover – Mandatory reporting of privacy breaches – Strengthening cross border data flow protections – Penalties – Strengthening the Privacy Commissioners information gathering power etc.
WHAT YOU SHOULD DO NEXT?
Speak to your local Area Manager, we specialize in credit management and we can assist you with your review of your business operations to ensure your meet the guidelines of the EU Laws and Privacy Legislation.
Don’t procrastinate in getting your debts into EC Credit Control. Whilst we cannot guarantee any collection, in our experience the earlier we get the overdue debt, the better the chance of success. With Christmas approaching it is even more important to get your debts in for collection so as not to be delayed further by businesses and individuals going on extended breaks, making contact and resolution more difficult. To this end ask your Area Manager to show you our new AIMS product, a system that will help you to efficiently monitor and submit overdue debts for collection in a timely manner, allowing your aged debtors report to look much healthier.
Prove the Debt at the Outset:
When you send us the debt, at the very least send us the itemised invoices and the signed contract (if held). Further important documents to send might be statements/correspondence and personal guarantees (if held). Sending these to us at the outset negates delays in us seeking them later as invariably the first response from the debtor is “what is this for” and/or “please provide the proof of debt documentation”. We scan these documents to the file so when debtors ask for them we can provide them swiftly whilst the call continues, thus negating unnecessary delays that debtors often use to their advantage in responding at a later date.
Disclosure/Acceptance of Terms:
A common ongoing issue for creditors is the correct use of their terms when disclosing and obtaining acceptance prior to providing goods and services to their debtors. Remember signature is king. If you get a signed contract prior to the debt being incurred we are better equipped in attempting recovery of your debt. For many of you EC Credit Control has provided you with a terms of trade. It is important to read and understand the User Guide provided with the terms of trade, as if not correctly utilised you can negate the enforcement of clauses around credit reporting and the recovery of costs for instance. You can purchase bags of concrete, but if you don’t learn how to prepare it properly before you pour it, the results may be less that satisfying afterwards!!
Small Debts Less Impact:
It is important to note that if the amount of the original debt is less than $150 in Australia and $100 in NZ (soon to be $150), that the credit reporting agencies (Equifax/Illion/Centrix) will not accept these accounts for default listing. Therefore in terms of having a negative impact on the debtor concerned, the only avenue to affect them is legal action which is not cost effective as a tool for recovering such debts.
When you submit a debt for collection you are telling us that no bona fide dispute exists in respect of that debt. Submitting a debt that is in dispute already severely waters down our ability to enforce collection of the debt. The credit reporting agencies (Equifax/Illion/Centrix) have rules around disputed debts. Essentially a debtor cannot be default listed for a disputed debt unless you hold a court judgement overruling the dispute. The only consequence we can follow through on apart from contact and demand documents is legal action which has further upfront costs for you to consider. Whilst some disputed debts will be resolved via the collection process, some will not and you may delay your opportunity to seek court redress.
Have you ever been stuck with the dilemma / hassle of a client emailing you to proceed with a job but left you still without a proper signed agreement?
You obviously want the work, you want to keep your new client onside, but you also don’t want the headache if things go pear shaped when it comes to getting paid by having no contract in place to protect you and give you the best possible chance to recover your money.
What to do!? Take the job on with essentially only an “electronic handshake” to protect you, cross your fingers and hope for the best? Or, have the extra task of insisting on the client signing and returning your Terms of Trade before commencing. This can create inconvenience at the start of the job but provides great reassurance at the end when it comes to getting paid.
With everything increasingly being done over the internet and average payment days for business continuing to be on the rise it is a little of the damned if you do, damned if you don’t.
The solution for you could well be a new software system called JGID – Just Get It Done! A game changer for any professional services or trades business. It combines the ease of winning a new job/having a quote accepted over the internet/email with the reassurance of having your terms of Trade disclosed and accepted by your client at the same time.
By making it easy for your clients to sign your quotes electronically, JGID makes the whole quotation acceptance process seamless, whilst allowing you to continue to win jobs easily with the peace of mind of having a watertight contract to cover your back.
But the software doesn’t stop there. JGID comes with a mobile app for your fields staff that works on any device, does timesheets, invoicing and a great deal more, potentially saving you hundreds if not thousands of hours a year in reduced admin time and down time on site.
One key feature is that it also makes it extremely easy for you to lodge debt collection, straight from within your job management system.
At the click of one button within JGID, you can send an email to EC Credit Control with the signed quote and the unpaid invoice attached automatically, making EC Credit Control Australia’s first debt collection agency offering this level of convenience for businesses like yours.
9 quick facts you need to know about equipment finance
After 25 years of financing equipment for capital intensive industries, we thought we would share a few facts which will assist business owners in getting this area right.
1) Interest rates can vary by as much as 1%, so it pays to shop around
Unlike home loans, interest rates on equipment finance are very much open to the competition of a free market & as such can often be negotiated down by as much as 1% if sufficient competition is created between financiers so it pays to shop around. A saving of $100 p/m over 60 months is $6,000 and if your company runs at a 10% margin, that saving is equal to an extra $60,000 in top line income.
2) The only hard security needed is the asset itself, so don’t fall into the bank trap
The only hard security for equipment finance should be the equipment itself. Where a client uses their own bank for equipment finance, there is a very good chance that this loan will be secured (cross collateralised) against other assets including real estate, see recent article GETTING EQUIPMENT FINANCE RIGHT.
3) Spreading your equipment debt across several financiers provides many bonuses
Equipment finance allows a company to spread a greater portion of the overall debt to a broader base of financiers which means less exposure to their existing bank, greater competition between financiers to drive lower interest rates, often better approval conditions and a broader base of competitive lenders to assist in financing future growth.
4) The market has changed with many financiers no longer needing financials to provide finance approvals
Many financiers have switched to “behavioural” credit assessment instead of looking at historic financial information to approve transactions. If a company has been in existence for 3 years, has a clean credit history and the principal is a property owner, approvals are automatic for up to $150,000 on additional vehicles and selected plant and up to $500,000 where it is a replacement requirement. The interest rates are just the same as for normal “fully assessed” transactions.
5) Thinking about equipment finance the same way as a credit card limit has its benefits
Just as in the same manner as you are approved for a “limit” on your credit card, Pre-approved bulk facilities for equipment finance can be set up in advance across several financiers & at no cost, making it easier for companies to acquire additional machinery at short notice without having to seek finance approvals in each instance. Facility limits which can be set up for amounts from $200,000 to $3million & are simply reviewed every year at the time the client has updated financial information
6) Used Equipment is as easy to finance as New Equipment
Quality used equipment (which is often substantially cheaper than new gear) can have finance arranged just as easily as new equipment and so presents as an excellent alternative to new equipment.
7) Private Sales can definitely be financed and a lot of money saved
Competitive equipment finance is easily available where the used equipment is being purchased from a Private Vendor. These private sale equipment finance arrangements do need a couple of additional steps performed, however the savings can be significant compared to new machines or used machines through a dealer. The extra steps are simply an inspection of the goods and a more rigorous PPSR regime to ensure clear title is passed onto the financier.
8) Financing GST is cheaper debt than an overdraft
GST can in most instances be financed as a part of the equipment finance facility if required by the client and in doing so provide what is in essence a very low cost working capital debt which is substantially cheaper than traditional overdraft rates. In the event that the customer does not want to finance the GST long term, however does not want to pay for it out of cash flow at the time of purchase, an extra payment can be made at month 4 of the transaction to coincide with the period where the client has the cash from their subsequent BAS refund.
9) All equipment finance is not the same when it comes to tax deductions
Although CHP & Chattel Mortgage structures limit a company’s tax deductions to the interest & depreciation components of the asset (which is often far less than the physical annual payments of the debt), the prudent & appropriate use of an Equipment Finance Lease can often provide a tax deduction EQUAL to the monthly or annual payments being made under the Lease as the monthly payment itself is the deduction. This is often an underutilised product which is well worth investigating with your accountant and may save significant tax dollars.
Mark O’Donoghue, CEO & Founder of Finlease
This was the headline in a recent Courier Mail article that should strike fear into the heart of every small business owner. Why? Because it refers to Clive Palmers company Queensland Nickel (QN) that has been grabbing headlines for all the wrong reasons over the last two years. As it currently stands, liquidators are chasing millions of dollars in payments that were made to suppliers and service providers to QN in the months leading up to the collapse. There are some creditors being pursued for amounts in excess of $100,000, which is a massive hit for any business to take!
Liquidators are obligated to recover funds for creditors where possible. Under the Corporations Act, payments made to creditors up to six months before their appointment can be recovered as “unfair preferential payments”. It is usually bad enough when a client you have been dealing with goes under owing you thousands of dollars. But, what can be even worse is if a Liquidator has the ability to recover money from you that you have already been paid and likely reinvested into your business! This happens more often than most people realise.
So imagine your biggest client falls over tomorrow. What is the client worth to you in revenue each month? Now, multiply that figure by a factor of six. Whatever amount you come up with, ask yourself the serious question, “can I afford to take a hit that big if a Liquidator comes knocking?” Yes, it is worst case scenario, but even if it isn’t your biggest client, even a mid-sized client falling over can be enough to send a small business over the edge. Do you really want to run the risk and test out the theory?
The ATO and the Federal Government have been leading the push for companies to be wound up in recent times. The very latest news out of Townsville now has the local mayor campaigning for the Corporations Act to be changed to protect business from such scenarios. Any change to such legislation is far from guaranteed and would be many years off from being implemented even if it did occur. And that is a big “if”.
But what a lot of people don’t realise is that the legislation already exists to protect small business from such scenarios. Under the Corporations Act, liquidators only have the ability to pursue a preference payment from an “unsecured creditor”. Secured creditors have automatic immunity. How do you become a secured creditor? A simple registration on the PPS Register (www.ppsr.gov.au) over your client gives you secured creditor status. It lasts for up to seven years and provides automatic peace of mind in the event a worst case insolvency scenario unfolds.
Simple protection for a serious situation.
From 12 November 2016, new legislation was implemented whereby unfair contract term protections were extended to cover small business contracts rather than just contracts between individual consumers. This has had significant implications for business to business transactions and we are now seeing the Australian Competition & Consumer Commission (“ACCC”) take steps to enforce the protections afforded by the extended unfair contract terms in seeking to have contract terms in certain contracts deemed void.
One recent and significant example is action taken by the ACCC against JJ Richards & Sons Pty Ltd (“JJ Richards”) in the Federal Court of Australia seeking declarations that certain terms in the standard form contract used by JJ Richards from 12 November 2016 were void and unenforceable. JJ Richards is one of the largest privately owned waste management companies in Australia and provides recycling, sanitary and green waste collection services.
To provide a background to the changes in the unfair contract term legislation we advise as follows:
(a) Contracts covered by extension of the protections
The new legislation will apply to small business contracts in standard form entered into or renewed on or after 12 November 2016. The following contracts will be affected:
(i) Where the contract is for the supply of goods or services or the sale of an interest in land;
(ii) At least one party is a small business, being a business that employs less than 20 people;
(iii) The upfront price payable under the contract is no more than $300,000.00 or $1,000,000.00 if the contract is for a term of more than 12 months.
(b) What is a standard form contract
A standard from contract is one that has been prepared by one party to the contract and the other party has little or no opportunity to negotiate the terms – that is, it is offered on a “take it or leave it” basis.
(c) What is an unfair contract term
Under the Australian Consumer Law, an unfair contract term is a term that:
(i) Causes significant imbalance in the parties’ rights and obligations;
(ii) Is not reasonably necessary to protect the interests of the party who would be advantaged by the term; and
(iii) Causes detriment (financial or otherwise) to a party if it were to be relied upon.
In order for a term to be unfair, it must satisfy all criteria. The Court will look at the contract as a whole to determine whether the term is unfair.
JJ RICHARDS CASE
As one of the first court actions brought by the ACCC, declarations were sought seeking the following contract terms as void an unenforceable in the standard form contract used by JJ Richards:
(i) Binding customers to subsequent contracts unless they cancel the contract within 30 days before the end of the term or otherwise known as roll over terms;
(ii) Allowing JJ Richards to unilaterally increase its price without reference to the other party;
(iii) Removing any liability for JJ Richards its performance is “prevented or hindered in any way”;
(iv) Allowing JJ Richards to charge customers for services not rendered even when caused by reasons beyond the customer’s control;
(v) Granting JJ Richards exclusive rights to remove waste from a customer’s premises;
(vi) Allowing JJ Richards to suspend its services but continue to charge the customer if payment is not made after seven days;
(vii) Creating an unlimited indemnity in favour of JJ Richards;
(viii) Preventing customers from terminating their contracts if they have payments outstanding and entitling JJ Richards to continue charging customers equipment rental after the termination of the contract.
The Court held that when read together as whole in the contract, all the above terms exacerbated each other and increased the overall imbalance between the parties and the risk of detriment to JJ Richards comments.
The declarations sought were ultimately consented to by JJ Richards in the court proceedings and thus the above terms were deemed by the Court to be unfair contract terms.
JJ Richards consented to orders restraining it from relying on the deemed unfair terms existing in their small business contracts and from using such terms in future contracts. JJ Richards also consented to publishing a corrective notice and providing a copy of the court orders to all its small business customers which are parties to an affected contract.
If a term in a contract is deemed void, the remainder of the contract continues to bind the parties to the extent that it can operate without the unfair term.
The JJ Richards case is an example and indication that the ACCC is targeting unfair contracts as a matter of priority and it has already targeted a number of companies regarding their terms.
There is no doubt that Forensic accounting is still the domain of large corporates and government. Its about the detection of fraud and big prominent collapses like Enron and Tyco come to mind. Nevertheless, is there a place for fraud detection and minimisation in your business?
Engage a professional to guide you with giving your business effective immunity.
What is a personal Guarantee?
A personal guarantee is a written promise to guarantee the liability of one party for the debts of another party. Commonly, personal guarantees are given by directors of companies to personally guarantee the payment of money or obligations on behalf of their company.
How to secure your business?
In addition to your businesses contracts, personal guarantees provided by your customers, contractors or supplies can be an essential security to your small business.
This is exceptionally useful when it comes to enforcing a debt owed to your business as it allows your business to pursue the director of the company for all debts owed by that company. There are numerous benefits to obtaining a personal guarantee from a director of a company; those being:
What is essential to ensure a binding personal guarantee?
There are a number of things that are important to ensure that the personal guarantee provided is a binding guarantee:
What to be aware of if you are signing a personal guarantee on behalf of your company
While it is essential to ensure your business’ process by creating a rock solid personal guarantee document for customers, contractors and suppliers to execute, there might come a time where you will have to sign a personal guarantee guaranteeing the obligations of your own company to another contracting company. Many people tend to sign personal guarantees on behalf of their company as part of the usual contracting process and they do not think twice. This can sometimes leave you being personally liable on behalf of your company, and you might not even know it!
To protect yourself when signing business documents, it is recommended that you read and understand every document you are signing and if you do not understand you should seek legal advice.
With respect to signing a personal guarantee, there are a few items that you should look out for so that you know you obligations under the personal guarantee:
A several guarantee is when there may be more than one guarantor signing the personal guarantee (for example, a second director). In this instance a several guarantee would make each director separately liable for the debts of the company, dependent upon the terms of the guarantee.
A joint and several guarantee means that each guarantor (usually the directors of your company), are liable, both separately and jointly, for the full debt owed by your company and you will not be liable for 50% of the debt if there are two guarantors; you will be liable for the whole of the debt.
Normally a personal guarantee secures a company by stating that the guarantor will be liable for “all monies” due and owing by the primary contracting party. However, the term “all monies” is quite broad and in essence could apply to anything. It is suggested that you negotiate and understand this term with the company you are contracting with and arrange the negotiation of what “all monies” means in writing so you are sure about the limitations of your liability.
If you are a small business owner and require expert assistance with preparing a rock solid process for your business’ contracts and guarantees, or you are regularly engaging in contracts on behalf of your company, and you have legal questions regarding your rights under a personal guarantee, contact JHK Legal and we can provide you with a tailored written advice to your needs.
Additionally, if there is anything further that JHK can assist you with that is not related to personal guarantees, please do not hesitate to contact any of our offices.