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Managing your finances: A guide for businesses and individuals

Managing your finances: A guide for businesses and individuals

Federal and state governments recently announced a range of measures to support small and medium enterprises (SME) in response to the impacts of COVID-19 (coronavirus).

Support included $105 billion of additional funding to authorised deposit-taking institutions (ADI) to incentivise lending to small and medium businesses in response to impacts from COVID-19.

The recent announcements are positive news for business owners and individuals, many of whom may be facing financial difficulties. Evidence to date reinforces that the banks are standing behind their customers and continuing to process recent applications. They also have processes in place to manage the current situation and are obliged to assist borrowers where possible.

With many people and businesses impacted by recent events, it’s critical to understand the options and the available support. Below, is a list of tips to consider to ensure effective management of your finances at this time.

Support for businesses

In uncertain times cash is king. Forecast your short-term cash flow position for a minimum 12-week rolling period for informed decision making. The forecast should consider the newly announced government support to businesses, financier support and the cash flow impact of difficult management decisions.

Review your funds

  • Confirm your total overdraft limit and calculate the undrawn amount.
  • Determine the level of your available security to understand the potential for asset leverage.
  • Consider funding your equipment through asset finance rather than cash, and where asset finance contracts are in place consider deferral of payments.
  • If you must overdraw your account, provide the bank with evidence of your source of clearance (i.e. how you will return your account to credit and clear this arrangement if possible).
  • Businesses turning over under $50m can refer to the Coronavirus SME Guarantee Scheme. Stay abreast of how this lending process will work and consider whether $250k is enough for your business.

Leverage your relationships

Work collaboratively with your business banker. The best support is likely to come from your existing lender, and the government has sought to reduce red tape associated with responsible lending obligations to expedite lending. Work closely with your advisor and your banker to see what this means for you.

  • Ensure you know your business banker, their assistant and team leader. Multiple contacts are important.
  • Ensure you have access to all forms of electronic banking to stay on top of your balance and available cash.
  • Understand timeframes and requirements from the bank. Hold them accountable where reasonable but, also ensure you are responsive to requests for documentation, and when required to execute forms.

Did you know: You may be eligible to access repayment relief measures from your lender on loans, including fixed loans and importantly on asset finance contracts, which has not been widely publicised.

Check your covenants and what constitutes a default

Familiarise yourself with the terms of your most recent loan contract and letter of offer to best understand your obligations and options. Under normal circumstances, most borrowers need only be concerned if they are in arrears.

Most small businesses don’t have covenants. In most instances, covenants are only placed on loans in excess of $3m. In cases where they exist, circumstances may arise whereby they are breached. If you are at risk of breaching covenants, engage your lender in a planned manner and discuss your short and medium-term strategy for repair of the covenant. At present, ongoing communication with your bank or lender is essential.

Australian Taxation Office

The ATO is actively working with businesses, with payment deferral options for eligible businesses. Learn more about the support available to do you by clicking here.

Managing hardship

Refer to your bank’s website for the institution’s specific measures, noting specialist departments will be focused on those customers most at risk of loss or needing immediate support. Earlier announcements from Australian Banking Association chief executive officer Anna Bligh says all small businesses who are impacted by COVID-19 will be entitled to a six-month deferral on all loans. This appears to have been implemented across banks. For more information, get in touch with the right department here.

Support for individuals

Most borrowers with loans over two years old will have some level buffer in their home loan and will qualify for lower payments due to the progressive reduction in home loan interest rates in recent years. This may mean there is no need for payment deferral immediately, however, the following guidance is provided to help you keep on top of your personal lending situation.

Review your loan balance and determine if you currently need assistance

  • Are you in advance on your loan? You may not need assistance at this time.
  • Do you have funds in offset? If yes, this may serve as a buffer.
  • Do you need to make a full repayment or is part or no repayment an option for a period? Defining your short-term and long-term needs is important before speaking to your lender.
  • Remember, most loan repayments are via direct debit so if you want to vary this you will need to contact your home loan provider.

Review interest rates

Check your interest rate on every loan to ensure they remain market competitive following recent cuts by the Reserve Bank of Australia (RBA). The last rate cut was not passed on to most variable rate customers creating a significant gap between fixed rates and variable rates. Discuss your circumstances with your adviser and consider carefully before switching from variable to fixed or from principle and interest to interest-only. Note that interest only rates are higher than variable rates and may not be the best option for your unique circumstances.

Assess your redraw capacity

Have you got capacity to redraw funds that are currently in advance on your loan? If you do, you may not need assistance at this time. If not, let your lender know this when discussing payment deferral.

Review your credit card limits

Review your credit card limits to assess availability of funds. If you have a large balance you are struggling to pay, consider contacting your card provider to discuss repayment options.

Review your margin loan

If you have a margin loan, review your balance and loan to value ratio (LVR) daily to avoid an untimely margin call. Consider topping up your portfolio with shares held outside of your margin loan to decrease your LVR. If you have cash available, consider paying down your margin loan to pay down your loan and avoid margin calls.

Recent property purchases

If you have recently bought a property (i.e. it hasn’t been approved or settled), ensure you provide your lender plenty of time to process your application. Many banks take 20 plus days post final submission to process applications so allow at least 30 to 60 days from submitting the loan application to the settlement date.

Engage with advisors to support you as required as they should be aware of service level agreements and where your loan has the best chance of successful approval and being processed in time.

If you were planning to sell a property to meet settlement on your new purchase, please consider whether you will need bridging finance to effect settlement. Note, this is now a specialist area where not all funders have been actively participating because of high qualification hurdles such as the requirement to service the peak level of debt, and increased scrutiny on expenses.

Managing hardship

If you’re experiencing hardship, contact your lender and ask for a repayment holiday on your mortgage, credit card and/or car loan repayments. This is a regulated area and all funders will act within the law and are typically receptive. They will qualify whether you need to do this and may provide an initial 3-month deferral of payments, which can be extended to 6 months and beyond where required.

When dealing with funders it’s important to be proactive and prepared with up-to-date financial. For more information or for advice related to your specific situation, engage your advisor and leverage the experience of others in dealing with funders.

This material has been produced by Pitcher Partners Finance Pty Ltd and has been prepared for informational and discussion purposes only. It is not professional advice. Before making any decision or taking any action in relation to this material, you should consult your professional advisor. ACL 389328 under licence with Connective Credit Services Pty Ltd.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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