Buying property as a small business owner
Small business owners are no different to the rest of Australia, and would often love to buy property … whether that be a new home, investment property or commercial premises.
However, those small business owners that have applied for a loan before may have seen the different and excessive rules that apply (compared to employees) when trying to obtain finance.
So how should you go about obtaining finance in the current climate, post Royal Commission, when operating a small business?
Ideally, banks want to see 2 years’ worth of Financial Statements and Tax Returns for the business and you need to be profitable.
Importantly, you can’t have it both ways, minimise tax and then obtain a large loan. The banks have started equating tax returns (with little or no adjustment) to your income for loan purposes, which is very different to years gone by.
So you need to think ahead, what is more important, saving a few hundred dollars in tax by squeezing in private items in as a tax deduction or obtaining finance for that new home/commercial property.
Pay your Tax/BAS and Employee Superannuation on time
Delays in paying tax, BASs debts or employee superannuation are more often than not seen as an instant denial of finance by the bank. The banks like to see that you can pay your debts if and when they become due… the ATO debts are no different. Importantly, the ATO also has a right to faster payment terms, priority in some cases over assets, and higher interest rates. So the bank get “bumped down the queue” and see you as a higher risk because of that.
Talk to your bank/broker and accountant early
One of the largest mistakes we see, is the small business owner advising the broker/bank and accountant last…. “Hey… I just signed a contract”!
This is a big mistake. Firstly, you should talk to your bank/broker about what they will need, in detail, to approve finance. Ensure you are able to provide that, can sustain that level of borrowings (interest rates may be higher) and your business figures will back that up.
Get your advice from the Accountant on which entity should be on the contract (can’t change afterwards) and what time delays might be in place to get that supporting documentation to the bank. Short “unconditional” timeframes and settlements may not be possible if your records for the last year aren’t done and finance is dependent on it.
There is no such thing anymore as pre-approved loans. We have seen very stable clients, pre-approved by their manager, only to have “credit” teams at the bank make the client jump through hoops for months to be finally approved. Don’t assume because the manager said so, that it is a done deal.
Using a Self-Managed Superannuation Fund will make it easierUsing a Self-Managed Superannuation Fund (SMSF) will do anything but make it easier. While a SMSFs can be advantageous in some circumstances, the legislative and banking requirements around it are laborious.
You will often need Financial Advice, potentially new entities (Bare Trusts) – add $5,000 to $7,000 setup, and 3 months settlement terms. Add to that, the fact that only very limited banks allow borrowing using a SMSF anymore and the ATO are warning against it… this is no longer the golden goose of the past.
Budget – save a deposit and have a bufferThis last one is a direct outcome of the Royal Commission. No longer will the bank assume you can finance a loan based on standard expenses (called HEM) for your size family. Instead, they will pour over your bank statements and analyse where you spend your money and how much you have left over each month.
If you haven’t been able to save a deposit or put aside “repayment amounts” in the last few months, then they are likely to ask you lots of questions on where your money goes and whether you can “truly afford” the loan repayments.
We recommend saving up a deposit, putting aside 2 months’ worth of repayments and cancelling unused Credit Cards (reducing limits on others) before consulting with the broker. While this is probably a bit more than you actually need (depending on the bank), it will greatly improve your chances of having prompt finance approval.
You should also allow for costs for your lawyer and accountant to deal with the bank finance process (explaining and signing off on bank guarantee documents, providing all the supporting tax returns and ATO information, plus supporting letters).
As small business owners, we get to be our own boss, maybe have some flexible time and control our own destiny. One of the downsides is the extra hoops we have to jump through to have a loan approved. If you plan ahead, you can make the whole process much more bearable…. At the end of the day, the goal is worth it.