Getting the finance you need to ensure business success

Business lending is shrinking as banks continue to favour home loans over business loans in their short-term approach to capital use and returns. It is stifling the economy and it is a major frustration for businesses that are seeking capital to fund their growth. In their recent submission to David Murray’s financial system enquiry, Industry Super Australia confirmed that the amount of commercial lending for every dollar of residential property lending has plunged from $3.84 to $1.62 over the past 25 years. The land of opportunity has become the land of property.

How do borrowers navigate these changes? Communication between borrowers and lenders is the key to a successful banking relationship. Bankers do not like surprises. As a borrower, be proactive and provide financial information that is both timely and accurate. Prepare and deliver on financial forecasts and projected financial covenant ratios. These add to a borrower’s credibility and offer opportunities to negotiate during the loan renewal process. Additionally, business owners should stay focused on their core business and have a solid business plan with contingencies in place.

So businesses who are seeking funding need to carefully consider the way they frame their finance proposal to their banker, positioning it in the best possible light. A professional, well-thought out application with strong supporting documentation is critical. Understanding what banks are looking for will help you get it right first time and improve your chances of success.

Banks typically look for three major elements when they assess your business’ credit risk. These are commonly known as ‘The three Cs’.

The first critically is ‘character’.

Bankers will assess your character by reviewing a range of documents that provide information about your history, track record and experience in business. They are seeking to understand your commitment to a relationship with the bank. Considerations include:

  • Have you been able to meet your forecasts?
  • What is your repayment history like?
  • Do you do what you say you will do?

The bank will also want to see that you have plenty of ‘skin in the game’. Are you contributing enough to your own cash or equity to the purchase or new project?

The second thing a banker will look for is ‘collateral’.

Here the bank ‘credit department’ reigns supreme. They will be seeking all the first mortgage “bricks and mortar” security they can get their hands on supported by a mortgage over your equipment, other assets of the business and personal guarantees from directors. Think twice about pledging all of your assets if you can avoid it as it limits your borrowing options in the future.

Thirdly, a banker wants to look at your ‘capacity’.

They need to know that your earnings are sufficient to pay the loan back without creating distress. When you apply for the loan, you will be asked to outline all of your income, and provide comprehensive financial data on the business. These will include cash flow and profit and loss forecasts and a robust business plan.

Once you have satisfied the ‘three Cs’ there remains much devil in the detail. Your ranking in this area will determine how much negotiation leverage you have around some very important final points namely:

Covenants – These are the ratios and conditions that the bank will monitor to ensure satisfactory performance of your loan. They may include the ageing of your debtor’s maximum, stock levels and interest cover (the number of times your net profit exceeds your interest bill). Breaking these covenants give the bank the power to charge penalty interest rates and even call in your loan. So it is sensible to ensure they are achievable. While it is important to monitor them once in place, practically they are usually regarded as a guideline by the bank and a lever to deal with relationships that have deteriorated beyond repair.

Security – We live in difficult and uncertain financial times. While it is necessary to ensure the bank has ‘sufficient’ security, do not be overly generous. Look to exclude the home and personal assets where possible. Maintaining separate banking relationships for business and personal loans can give you options and keep each bank on their toes.

Repayment terms – Interest only terms take the cash flow pressure off your business by excluding the additional burden of the extra loan portion payment particularly in the early period of the loan. Banks however are keen to see a start to the repayment of their loan and are reluctant to extend interest only beyond two to three years.

Even if you satisfy the three ‘Cs’ and all other lending criteria you may experience variations between banks so it’s important to get some advice. Some banks have particular industry focuses (and usually specialised products to match) and others will seek to reduce their exposure to a type of business purely because the bank has a high total exposure to that area they are seeking to reduce on a pure risk balance basis.

In a challenging borrowing environment a thorough understanding of how banks assess your position; a well thought out finance proposal; and careful consideration of the terms will give you the best chance to obtain the finance you need to ensure business success.

Federal Budget 2014 – “Lifters not leaners”

An old proverb says “people unite over problems but divide over solutions”.  The weight of expectation lies heavily on Joe Hockey’s first Federal Budget to solve many many long standing fiscal problems without creating a war in the voter base over the solutions.  The budget sell is an appeal to a vision of a national ideal that Australians are “lifters not leaners”.  It is a sales pitch with modest increases in taxation and significant cost reduction measures including significant welfare reductions.  In return, the budget deficit will reduce from a projected $49.9 billion in 2014 to $29.8 billion in 2015.

Almost all the tax increase measures had been leaked prior to the budget.  Of 235 pages of budget measures, only 14 pages are devoted to revenue measures.  The headline revenue measure is the 3 year “Temporary Budget Repair Levy” of 2% which applies to income in excess of $180,000.  This increases the personal income tax rate to 49% from 1 July 2014.  To match the personal tax increase, the FBT rate increases to 49% from 1 April 2015.  Interestingly this means that there is a 2% benefit to packaging taxable fringe benefits for people on more than $180,000 between 1 July 2014 and 31 March 2015.  Will we see a salary packaging frenzy in the short term?  The same opportunity arises from 31 March 2017 to the end of the 3 year levy on 30 June 2017.  Indexation of the fuel excise is set to recommence ½ yearly by indexation to movements in customs duty rates on other fuels.  This will hit people at the bowser.

The balance of the budget is devoted to expense measures directed at cost management and reductions and which affects various forms of welfare.  In particular, the reduction in the income limit on primary earners for Family Tax Benefit B from $150,000 to $100,000 will sting the middle class from 1 July 2015 and apply only to children under 6 with a 3 year phasing out for older children.  From 1 July 2015 the Medicare rebate for a standard consultation will reduce by $5 with a doctor entitled to collect a patient contribution which would appear to create a $2 per visit windfall to doctors who choose to collect $7. Patients on concession cards and with children under 16 return to the current rebate after 10 visits each year.

Gens X, Y and late blooming boomers (born after 1 July 1958) will be hit by the increase in the qualifying age for the aged pension to age 70 by 1 July 2035. Pension income and assets threshold increases will be paused for 3 years from 1 July 2017.  The increase in the SGC rate to 12% will be slowed rising to 9.5% from 1 July 2014, remaining static to 30 June 2018 before rising over 5 years to 2023 to 12% and excess super contributions will become refundable.

Students will be affected from 1 July 2016 by a requirement to repay HELP debt at a lower starting income level set at 90% of the threshold that would currently apply, being in the order of $50,638.  However, the rate of repayment will reduce from 4% to 2% of income above the threshold.  The “cost of finance” on unpaid HELP debt will also be increased to a rate matched to the 10 year bond yield capped at 6%. Deregulation of fees for higher education will also shake up the cost of higher education.

What about small to medium enterprises? Not much.  $10,000 per employee to employ a worker over 50 who has been on benefits for 6 months.  A modest reduction in the refundable R&D tax offset of 1.5% applies from 1 July 2014 in anticipation of the drop in the company tax rate to 28.5% from 1July 2015.

All of these measures are of course subject to approval in a post 1 July hostile Senate which would appear to require cooperation with the Palmer United Party.  Early theatrics suggest that this could, at least, be entertaining.

Individuals & families

As a result of the need to improve the budgets bottom line, this years budget has focused heavily on individuals and families.

We note in particular that the changes to the family tax benefit part B will have a significant impact on many family budgets.

Deficit levy of 2% (Temporary Budget Repair Levy)

From 1 July 2014 to 30 June 2017, a temporary three-year deficit levy of 2% will be imposed on individuals with taxable income over $180,000.

A number of other tax rates that are currently based on calculations that include the top personal tax rate will also be increased accordingly (except the Fringe Benefits Tax rate) for the relevant 3 income years.  However to prevent high-income earners from utilising fringe benefits to avoid the levy, the FBT rate will be increased from 47% to 49% from 1 April 2015 until 31 March 2017 (see also companies section on FBT).

Example.  For a taxpayer with a taxable income of $200,000 per year, this results in an additional tax impost of $400 per year or $1,200 in total over three years.


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Fountainguard – Prosperity Advisers joint venture to build inroads to Chinese market

Continued investment to drive future growth of the Asia Business Desk

Leading East Coast chartered accounting and financial advisory firm Prosperity Advisers Group has bolstered its Asia Business desk expertise by partnering with Fountainguard Pty Ltd to increase its advisory capabilities to the Chinese market.

The joint venture enables Prosperity Advisers to grow and consolidate its established expertise providing a full range of accounting, financial and management advisory services with a sharp focus on the Chinese market. Prosperity has 25 years’ experience and has a history of success working with the Asian market facilitating investment between Asia and Australia. As China’s economy continues its growth, the joint venture positions Prosperity to facilitate local participation in that growth.

Martin Zhao and Don Lee, Chinese ex-pats with banking and commercial backgrounds are principals of the joint venture and will bridge a cultural gap ensuring clients receive a seamless experience. Prosperity will lead a six-person team that will visit five key cities in China next month to meet with clients and key influencers and introduce the venture.

Allan McKeown, CEO Prosperity Advisers says, “Prosperity’s growth in its Asia Business desk continues apace and the joint venture with Fountainguard is an important strategic development. Through our global advisory network, Leading Edge Alliance, we have built strong relationships with Chinese clients investing in Australian assets, and helped Australians enter the Asian market. This partnership underscores our commitment to growing our Asia Business Desk and providing a blue-chip service.’’

Martin Zhao says, “The Chinese investment market is notoriously difficult to enter and Don and I were impressed with Prosperity’s success and approach. The partnership between Fountainguard and Prosperity will enable Allan and his team to really build upon their existing relationships and create multiple opportunities for clients; we are excited to be working with a progressive advisory firm to build their capabilities in China.”

“The relationship with Fountainguard is a key differentiator for Prosperity Advisers. While we regularly visit China and have personal relationships with our Leading Edge Alliance partners there, we believe we are amongst the first financial advisers to secure a strategic partnership to directly build a Mandarin-speaking on the ground presence with the Chinese market.

“Our Asian based clients have invested tens of millions of dollars into Australia and will continue to do so in the future. These investments have included property, resources and active businesses. The significant ‘Investor Visa’ market has enormous untapped potential.”

Government Incentives

As we approach 30 April it is useful time to think about Government incentive programs. This is because 30 April marks 10 months from the end of the financial year and is therefore the deadline for the lodgement of your R&D project details with Austrade. Once approved these projects give access to valuable tax concessions.

If you are a business that tries to be innovative or a business that comes up with new ideas, then it is a good time to revisit what the R&D incentives are and the type of activities that will qualify.

In addition to the R&D incentives, we will also look at the export market development grant. Like the R&D incentives, this is another government incentive that is very valuable to businesses.

Research and Development

What is R&D?
The R&D tax incentive program allows participants who satisfy the requirements to claim an additional credit in their return in relation to money they have spent on R&D. In some cases this credit can be refunded in cash.

In determining when R&D is being carried on core R&D means experimental activities that satisfy the following two requirements:

  1. The outcomes are not known and can only be worked out by applying some kind of systematic approach.
  2. Research is conducted for the purpose of generating new knowledge. For example better materials, or processes.

Leading on from the above it is also important that whatever the “thing” is, it is being developed for the purpose of commercialisation. Therefore the development of computer software for use within your business would typically not be R&D.

While we note there are quite a number of elements to the above, the potential application of these definitions is broad. There are also various more specific requirements such as specifically excluded activities. However as a starting point if your business does things that are new and involve some form of uncertainty regarding the outcome then it is worth considering these provisions further as you may be able to access these tax concessions.

What is the concession?
If the concessions are available then the following can be received:

  • A 45% refundable tax offset for those businesses with an aggregated assessable income turnover of less than $20 million.
  • A non-refundable 40% tax offset which is available for businesses with turnover between $20 million and $20 billion.

Export Market Development Grant (“EMDG”)

What is the EDMG?
Like the R&D concession the EDMG is also administered by Austrade and is a Government funded financial assistance program for aspiring and current small and medium business that are establishing themselves as exporters of either goods or services.

One of the key incentives it provides is a reimbursement up to 50% of eligible export promotion expenses for expenses greater than $10K, with a maximum reimbursement of $150K.Other points to note include the following:

  • The Grant is provided in the year following expenditure.
  • Grants are provided up to seven years to each eligible applicant.

Who is eligible?
Australian individuals, partnerships, company associations, co-operatives, statutory corporations or trusts carrying on a business in Australia may apply for the EDMG provided they:

  • Have an ABN.
  • Had an annual income of not more than $50 million during 2012-13.
  • Spent at least $20,000 on eligible export promotion activities during 2012-13. First time applicants may combine expenses incurred in 2011-12 and 2012-13 to meet this threshold.
  • Are the principal – they must own the product they are promoting (some exceptions apply).
  • Promoted the product for export and their product is:
    –  A good made in Australia
    –  A good made outside Australia where Australia will derive a significant
    net benefit from its sale overseas
    –  A service except those specified as ineligible in the EDMG Regulations
    –  A tourism service
    –  An event held in Australia
    –  An intellectual property right that mainly resulted from work done in Australia
    –  A trade mark first used in Australia, or which has significantly increased in
    value from its use in Australia
    –  Know-how that mainly resulted from work done in Australia.

 Type of expenses that are claimable – nine categories

  1. Costs paid to overseas representatives to market / promote the product (max $200,000).
  2. Cost of engaging an arms-length consultant to undertake export market research or marketing activities (max of $50K).
  3. Cost of travel during marketing visits ($300 per day).
  4. Cost of communications to promote product.
  5. Cost of providing free samples of product promoting for export.
  6. Cost of granting, registering or extending rights under foreign laws in relation to eligible intellectual property (up to a maximum of $50K per application).
  7. External costs directly related to participating in an international trade fair, seminar, in-store promotion, international forum, private exhibition or similar activity.
  8. External costs of promotional material, such as brochures, videos, advertising and website development.
  9. Costs of bringing potential buyers who are non-residents to Australia for an eligible export promotion purpose ($7.5K per buyer per visit, maximum of $45K per application).

As you can see the potential application of the above concessions is quite broad and also quite valuable. Therefore if you are currently looking to expand your business overseas the above concession may be able to provide you with some assistance.

Kogan is coming to get you!

Well maybe not Ruslan Kogan himself, however his brash approach to business and enthusiasm for challenging the status quo through leveraging the internet is being embraced by a whole new wave of entrepreneurs.

Kogan started his business, Kogan Technologies from his parent’s garage just seven years ago at the age of 23. The growth of the business has been phenomenal. It took Kogan six and half years to sell his 1 millionth product in December last year and he reached the two million milestone just six months later. He has grown his business turnover to over $250M without using external capital. Meeting Kogan recently with a group of new age entrepreneurs provided some insight into what has fuelled Kogan’s success.

1.   Fresh thinking

The direct to consumer channel, using the internet is not new and is becoming more common place but Kogan’s construction of his business model was innovative. He found it difficult to crack the supplier market to provide him with his initial small volumes at an attractive enough price to be successful with consumers. After a long series of rejections, Kogan went away and totally redesigned a Chinese company’s poorly worded instruction manual, resetting the design and rephrasing text into user friendly English. This act of adding value to the supplier enabled him to secure that vital first order to get the business underway.

 2.   What ever it takes

Supplier delays and a hiccup with eBay his initial main sales channel placed him in a tight spot to meet a critical shipment payment. He scraped together all he could on available credit cards, including some hastily organised new ones before turning to a few close friends, who did the same and ultimately saved the day.

 3.   Next practice is better than best practice

Kogan has a strong work ethic and has enculturated his team and organisation in the same vein. “There is always a better way”, is the motto that Kogan’s staff live by. The company does not provide any formal training for senior managers. Kogan’s view is that formal training is for people who want to look like they are learning. Team members use Google to cross-skill and research issues, powered by having a strong will to learn and be pragmatic. As an employer he is dismayed at the number of applicants who are driven by a sense of entitlement rather than, the will to prove themselves and be successful.

4.    The power of social proof

Our buying behaviours are strongly influenced by what we see others do. The café half full with patrons is more likely to gain more customers than the empty one next door. Kogan has turned this behaviour to his advantage through a live feed on his website. Every few seconds the website flashes up the name of the suburb and type of purchase made through his site. “Someone in Dandenong brought a Galaxy Notebook” flashes up on his website complete with a picture of the product and a link to its details. Kogan also knows what every cent he spends on marketing is doing. He knows what people click on, what brought them in, what they searched, what links they chose, what pages they landed on and what made them stay on the site or leave. He has several full-time people in his business just doing data analysis of search statistics and he jokes that Kogan is a statistics business masquerading as an online retailer.

5.   Profit is not evil

Kogan does not hide his light under a bushel. He is proud of his personal success and the extraordinary growth of his business. He unashamedly provokes those with bricks and mortar businesses and old style thinking, gaining notoriety for himself and his business.

 Kogan has been remarkably successful in a relatively short period and seems on track for continued achievement. He has taken massive market share from long established, solid bricks and mortar businesses. He is one of many new entrepreneurs challenging the way we operate our businesses and how we deliver products and services to a new generation of consumers.

Is your business Kogan proof?

5 Steps to build a gold medal business

Recently I had the pleasure of attending a private luncheon with Sally Pearson and what I saw was an inspiring woman who has been on an incredible journey to become the Olympic Champion she is today.  Her candid and down to earth conversation with us led me to think about the ingredients of her success and how similar they are in business.

1.  Dare to dream big

Sally is proud of her family and had a happy upbringing; however she did not have the financial support that most of us have enjoyed. Sally was raised by a single mother who worked two jobs to support her athletic career. Without a family car Sally dismissed the inconvenience of catching buses and taxis to training and events, while focussing on her ultimate athletic goal. Many of Australia’s most successful entrepreneurs have had challenging early lives that many in the same situation would use as an excuse for their lack of success. Instead, their vision for business and financial achievement became a beacon that they pursued diligently despite limitations that would dishearten most others.

2.  Overcome the setbacks

Now at the peak of her career, it has been a long and arduous journey for Sally who won the 2001 Australian Under-20, 100 metres title at only 14 years of age. Injuries are part and parcel of an athlete’s life and she worked hard to overcome several major setbacks during 2002 before winning the 100 metres World Junior Championships in 2003.

At the 2006 Commonwealth Games in Melbourne, Sally tripped over a hurdle and fell to the ground during the 100 metres hurdles final, hurting herself badly and costing herself a medal. Then, acute back spasms hampered her preparations for the World Championships in 2009 resulting in a disappointing fifth place.

Sally crossed the line first in the 2010 Commonwealth Games 100 metres final only to be disqualified for a false start. Even in the current season, Sally has twice torn her hamstring and has painstakingly worked to regain her fitness.

Sally’s ability to overcome setbacks is an attribute she shares with successful business leaders. In business, it’s “not if but when” an issue will arise from left field and present new and unexpected challenges. It’s the ability to assess the situation, work through the setback and get back on the path to success that distinguishes people like Sally and those that have weathered multiple storms to build sustainable businesses.

3.  Get a trusted adviser

Sally has been working with the same Athletics Coach for more than 15 years. Described by Sally as a love hate relationship, the candid nature of the advice she has been given has resulted in her achieving a personal best every single year. I have aptly heard advisers labelled as someone who holds your hat and coat while you are having a fight. It need not always be that way however. While the ultimate decisions will always rest with the owner/operator having someone independent from the business who will give you the hard nosed “tell it like it is” advice (which might be difficult to swallow) is invaluable.

4.  Focus on your own race

Just like in sport, where we see controversy after controversy, there is plenty of noise in business these days with analysis, surveys and opinions coming at you 24/7. The hallmark of a great business leader is an ability to assess the environment, then block out all the distractions and put a laser like focus on your your own business strategy.

Sally’s approach to competition is the same on race day. Sally has achieved outstanding success by maintaining complete separation from the other competitors, totally oblivious to their existence and focussed on what she needs to do to produce her best times.

5.  You need to be driven

As a junior Sally wasn’t even the best sprinter in her own Club. The other girl has long since faded from competition as Sally’s stature as an athlete, has grown. Her dedication to her vision, her determination to work through setbacks, her willingness to accept hard nosed advice and her focus on her personal performance to the exclusion of all else, is powered by a single minded drive to be successful. In 2011 the IAAF awarded her the International Female Athlete of the Year. She is the first Australian to receive this award.

It’s the same drive that has enabled some of our leading entrepreneurs to build remarkable businesses. Now I ask you, is it part of their DNA or was it learned?
That is another story.

Is your staff productivity reduced by financial stress?

What can you do to turn it around?

Recent statistics have shown that when your staff face personal financial stress, your business could suffer from poor productivity.

A recent survey reviewed over 450 organisations and found that employees under financial stress can spend up to 20 hours per month of their working time trying to resolve their personal financial problems.

It is a terrifying statistic for employers hoping for increases in staff productivity in these challenging economic times.

By bringing clarity and simplicity to your employees financial life, you can accelerate their financial success and assist them to obtain that extra measure of freedom that smart financial advice and wealth building deliver.

What can you do as an employer to reduce this drain on your business?

1.  Seek out financial education.  As an employer you could offer financial education to your employees, providing training to help them understand topics such as budgeting, the importance of saving, the difference between ‘good’ and ‘bad’ debt, insurance and superannuation.  There are a handful of firms nationwide that will come into your office and run tailored education programs.  These short courses provide education in financial literacy helping staff to understand their finances better and make improved financial decisions.

2.  Put in place a benefits package.  Depending on your industry, there are a range of benefits staff can access ‘before tax’, or in a way that can be supported by the employer.  If you put in place an Employee Benefits Package, staff might be able to access significant savings on superannuation fees, motor vehicle expenses, computers, life insurance and even meal expenses. In a corporate super plan as part of an Employee Benefits package, the fees and insurance premiums are often lower.

3.  Promote the benefits available to staff.  Many staff of companies with benefits programs are often unaware of the benefits scheme on offer.  But you can change this, helping your staff and increasing morale and productivity simply by promoting the benefits available.

Offering a structured financial Employee Benefits package to your staff will reduce their financial stress, make life transitions easier and help you to achieve a more productive, creative and effective work environment.

Article by Mark Sablatnig, Manager, Prosperity Wealth Advisers Pty Ltd.  Mark provides solutions about corporate super, group insurance and employee benefits to our clients from offices in Brisbane, Sydney and Newcastle.


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