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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 simply answer is yes, the EU Law and use of cookies that can affect privacy legislation in that it now requires websites to obtain consent from their website users to store or retrieve any personal information on a computer, smartphone or tablet.
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?
Almost all websites use cookies – little data files – to store information in peoples’ web browsers. Some websites contain hundreds of them.
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.
They are widely used to make the web experience more personal, which is generally seen as a positive thing. However some cookies collect data across many websites, creating ‘behavioural profiles’ of people. These profiles can then be used to decide what content or adverts to show you. This use of cookies for targeting in particular is what the law was created to highlight. By requiring websites to inform and obtain consent from users it aims to give web users more control over their online privacy.

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.
However, non-compliance could also have other, perhaps more serious consequences than enforcement. There is plenty of evidence that consumers avoid engaging with websites where they believe their privacy is at risk, and there is a general low level of trust about web tracking by the use of cookies.

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.
• Tell your users how you use cookies.
• Obtain their consent, such as by stating a disclaimer regarding cookies with a tick option for acceptance, thus giving the end user some control.
• Ensure you have an up to date Privacy Policy uploaded on your website to detail how personal information is handled, processed, stored and shared.

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.

At a recent meeting with a Shop fitter in the Inner West of Sydney, the owner explained that a large local Sydney Inner West business that they had done work for to the value of over $800K to date, went into liquidation. The company still owed the shop fitters $140K which was bad enough in itself. But then they received a demand from the liquidators demanding that the $660K that they had been paid from the liquidated company over the previous 6 months be paid back under the Claw Back provision in the Corporations Act.  

Talk about rubbing salt into the wounds. The preferential payment provision can be invoked by the Liquidator if the insolvent company has paid a creditor within the 6 months prior to the Liquidator being appointed.  

Fortunately for the Shop fitter, the Liquidator had made a fundamental error in their documentation, so with the aid of a Solicitor the Shop fitter managed to escape the Claw Back provision. In the end the shop fitter missed out on the $140K he was still owed and had an expensive legal bill to pay – but a lot less than the $660K they were up for if not successfully defended, which would have put them out of business.  

The moral of the story is, whether you’re based in Sydney’s Inner West or elsewhere in Australia, talk to EC Credit Control about how to protect your business from a costly and painful Preferential Payment claw back scenario.

I recently met with Ray, a builder based in Newtown in Sydney’s inner west. Ray had been trading for over 20 years without any bad debts – a really good effort! Newtown like any other suburb in Sydney’s Inner West has a number of businesses in the construction industry that can fall victim at any time to a bad debt.

After 20 years Ray suddenly had been hit with two big debts at the same time. The first debtor owed him $100,000 and started to question invoices, not only recent ones, but also invoices from previous years. The second, after Ray had supplied 3 months of labour, went into liquidation owing him $80,000. This is a major hit for any small business to try and recover from and highlights the importance of protecting your cash flow with a strong set of Terms of Trade, Contracts and sound Credit Management policy to monitor your clients on 30 day payment terms. Just like insurance on your car you never know when you are going to have to rely on it.

Recently a wine wholesaler, based in the Inner West of Sydney was very happy when EC Credit collected a debt of $12,500 and their Debtor was forced to pay all of the collection costs our client incurred, as per the debtor had previously agreed to. This result was achieved because our client had proactively invested in implementing Terms of Trade documentation back in 2012.

Wherever your business is located in Sydney’s Inner Western Suburbs, EC Credit Control has the resources and knowledge to help you protect your cash flow.

I had a Creditors Report come across my desk today, which is not that unusual, but what was unusual is the number and types of businesses I saw listed as Secured Creditors, having obviously registered themselves as Credit Providers on the PPSR. (Personal Property Securities Register)

Now whilst there were 262 Unsecured Creditors totaling a massive 6.5 million in unsecured credit, against only 44 Secured Creditors, I found myself really paying attention to the names of those secured creditors and the businesses they operate. Whilst I did recognise a couple of our clients on the Secured Creditor list there were quite a number of varied and smaller businesses which you don’t normally tend to see on a Creditors Report.

Which leads me to ask the question, Are Businesses Finally Learning How to Protect their Cash Flow with the PPSA? (Personal Property Securities Act)

What most businesses, and their professional advisors for that matter fail to realise is that no matter if you provide goods or services on credit the PPSA is there to protect their cash flow.

I would encourage all businesses owners to do a little investigation and find out for themselves how they can move from the list of 262 Unsecured Creditors to the list of 44 Secured Creditors.

“It’s your Business and Your Money”

As a member of the South West Sydney Business Enterprise Centre (SWS BEC) I attended their annual Business Night as a guest of the CEO, David Waudby. The night was attended by over 500 representatives of small business from the South West Sydney Region covering areas from Liverpool, Campbelltown, Narellan and Camden. It was a great opportunity to network with business people from the region.

The keynote speaker, Jamie Durie through his own business experience as a landscaper highlighted some key aspects to his success and how those principles could be adopted by others. The other speaker, Craig Rispin identifies himself as a business ‘futurist’ and has made his success through predicting the climate for business in the future. He works with many large multi-nationals to plan strategies for the future.

There was a diverse range of businesses and industries represented giving all attendees the chance to interact with others. During the course of the dinner I had the opportunity to discuss our credit management products with considerable interest in our Terms of Trade documentation and our PPSA Registration service from a local solicitor, a tourist operator and a commercial property agent. The night highlighted the positive and successful growth of business in South West Sydney.

The South West Sydney (SWS) Business Enterprise Centre (BEC) is one of many such government groups designed to help small business in the early stages of their growth. The SWS BEC covers an area from Liverpool, Campbelltown, Narellan and out to Camden. They offer advice on all areas of business set-up and organisation. After becoming a member of the BEC I had lengthy discussions with the CEO, David Waudby about the services that EC Credit Control offer small business in credit management. So impressed was David that he received approval from the BEC board to promote our services as a vital tool for small business to implement. In promoting EC Credit Control in the May 2015 Update David says “a review of existing credit control processes, condition and documentation is a critical part of all small business that must be conducted properly. The correct process for credit provision will save you time and money and possibly your business”.

I continue to work closely with David and his other advisers to create an awareness for all small business owners who provide credit to have the appropriate Terms of Trade documentation and credit plan in place to improve and protect their cash flow.