As a business owner, you have a lot to think about. Not only running your business but also in planning ahead, preparing for growth, managing challenges and taking advantage of new opportunities.
These plans and preparations may lead to new funding requirements for the business. The problem in many situations however is that the question of “how do we fund this?” is only addressed once the need has been determined.

In this article we will look at ways you can get your business ‘finance ready’ so that when the need for finance becomes apparent, you are already a long way down the track in being prepared.

1. Two Years Financials – the general rule of thumb is that banks and lenders want to see your last two years business financial performance as part of their assessment process. Here, they like to see strong profit levels across both years (don’t we all!). However, this can sometimes be counterproductive when completing your tax planning, so a good strategy is to start thinking about future financing requirements in the months before the end of the financial year and work with your CFO, Finance Broker and Accountant to decide how best to approach this, before the year is out.

2. Tax Debt –businesses (particularly in recent years) sometimes accumulate tax debt and in many cases, this is amortised as per an agreed payment plan with the ATO. However, many lenders don’t look favourably on these payment plans and either won’t advance monies while this is outstanding, or will insist on refinancing it into the finance proposed. Others may allow it but charge higher interest rates for the finance offered or at the very least include the ATO repayments as part of the ongoing business commitments (even if the plan is due to expire within the year). It may therefore be a good idea to think about tackling this debt and clearing it (if possible) well before applying for business finance.

3. Distributions and Dividends – Many business owners with companies and trusts will issue dividends or pay discretionary distributions to family members who are shareholders and beneficiaries. When considering this however, it is worth noting that distributions or dividends to your adult children may be excluded by a financier from the profit total to be used towards servicing loan repayments for new funding. This should form part of the tax planning considerations prior to financial year end when considering upcoming finance.

4. One off income and expenses – at the end of a financial year when you receive your financial reports back, you may be pleased to see a healthy bottom line (“perfect for the bank!’’), however be aware of one-off income receipts that you may have received during the year, as these will likely be deducted from the net profit total when being assessed for a loan. A recent example of this is Job Keeper and Government Boost payments received by many businesses in 2021. On the flip side though, many one-off expenses that are reducing written down profit totals may be added back by lenders due to their short-term nature. Instant Asset Write Off expenses are a good example of this.

5. Property Values – Another consideration is in terms of what the property markets are doing. Where lenders are using property (residential, commercial or other assets) as security they will also consider the Loan To Value ratio (LVR) of the borrowings to the security value. If the relevant property market is buoyant, it may be worth considering reviewing existing finance arrangements where more than one property is currently used as security, in order to see if it is possible to uncross and release one or more properties from the lending and still have an acceptable LVR with the security remaining.

6. Forecasts – this is a very under-utilised resource. Not only do most lenders like to see what the future holds for the business, these can be a great way to determine the underlying strengths and weaknesses of the business and help work out if a financing (particularly cashflow) need is going to be required months or sometimes years in advance. The best version is a 3-Way Forecast which covers Profit, Balance Sheet and Cashflow needs for the next 12-24 months.

Preparing your business to be ‘finance ready’ even in times when new finance is not immediately required, can save you a lot of headaches in the long run. And when the time does come, it will allow you to create a more attractive business proposition for lenders to consider and ultimately give you the ability to create competition for your business and negotiate better terms for your finance.

For further information or help in your next business borrowing, speak with us today on 9381 8311and we’ll be happy to assist.

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