Charles Sturt - 5th Year Students Overview of Financing

Possible Career Directions Employee in an existing private practice Associate- Sole trader operating out of a private practice Partner- Shareholder in a practice Owner- Sole owner of a Vet practice

Employee in Existing Practice BenefitsDrawbacks No overheadsRestricted earning potential Limited responsibilitiesRestricted Growth Learn how a practice works, without risk Limited choice of work

Partner – Shareholder in a Practice BenefitsDrawbacks Ownership of goodwill – Appreciating Asset Staff & Management Responsibility Income Growth Potential Debt From Buy-In Existing Client BasePartner(s)

Owner BenefitsDrawbacks Ownership of goodwill – Appreciating Asset Staff & Management Responsibility High Income Growth Potential Debt From Buy-In, or start-up Control of Business Decisions Partner(s)

What You Will Borrow Money For Car Working Capital Property Equipment Practice Purchase Construction Fitout

Impediments to Lending The Purchase The Seller The Buyer The Consultant The Decision Maker RULES

Structure of a Loan Principle Interest Term Residual/Balloon

Structure of a Loan Only $30,000! $30,000 4 Years 20% Residual ($6,000) 8% Interest $ per month Doc Fees $295 $30,000 2 Years 0% Residual 8% Interest $1, per month Doc Fees $295

But Wait, there’s more….. “$81 a week! – I can afford that.” Weekly payments based on 60m CHP, 10% deposit, 20% residual, 12.5%, plus establishment fee paid separately

But Wait, there’s more….. Deposit = $1, Residual = $3, Total of payments = $21,060 You Pay $26, Interest = $7,387.20

Types of Finance Asset Finance –Car –Equipment –Fitout Property Finance –Commercial Purchase –Residential Owner Occupied –Residential Investment –Commercial Investment –Commercial Construction –Residential Construction Unsecured –Goodwill –Line of Credit –Term Loan –Credit Card –Overdraft

Security What you give to the financier in return for money

Security

Rate For Risk 0% 5%10% 15%20%25% PropertyLoc Cars B Equip F&F Goodwill Personal Loan Int Free Cars Priv Credit Card

Property Loans Loan/Valuation Ratio –Limitations 60%/70%/80%/90% Lenders Mortgage Insurance –You pay. Around 3% of the loan value Fees –The more complex the transaction, the higher the fees Complications – SMSF Interest-only, or principle & interest –Personal circumstances, not affordability. Financier will want to see serviceability Commercial more than residential –Go figure Redraws

Property Loans Auction - From $250,000 Loan Approval for $280,000, got $70,000 Hammer falls at $350,000. Valuation comes in at $325,000 80% LVR is $260,000; deposit required now $90,000 Your LVR is 86%. LMI is $8,400; $18,130 including interest

Property As Security Second Mortgage Not Favoured Will only finance maximum of 80% of value Cannot sell or change usage of the property without permission If securing a business, you may lose the property if the business fails

Asset Finance Lease –Financier owns the asset. You lease (rent) the asset. You may purchase the asset at the end of the term. Finance is pre-GST. Rental includes GST. GST is claimable by business. Rental is claimable as a tax deduction by business. Hire Purchase –Financier owns the asset. You progressively buy the asset. Business use depreciation is claimable by the business. Business use interest is claimable by the business. Balloon is payable at the end of the term. No GST on payments Chattel Mortgage –You own the asset. Financier takes a charge (mortgage) over the asset (or business). Business use depreciation is claimable by the business. Business use interest is claimable by the business. Balloon is payable at the end of the term. No GST on payments

Asset Finance Fixed Term –Cannot be changed Fixed Interest –Cannot change over the term Asset Secures Itself –Usually no further security required Residual/Balloon –Reduces principle payments. Due at end of term. Can be refinanced Terms up to 7 years –3 to 5 is usual

Line of Credit Draw up to Maximum Amount Interest only paid by regular payment Fast Money High Interest No security No fixed term

Goodwill Secured or unsecured –May secure to unencumbered property May need to be valued or benchmarked Higher interest Take care when securing property Terms up to 10 years Interest only or principle & interest

Construction & Fitout Fixed price contract Cost overruns Progressive drawdown Potential for multiple valuations Administrative complexity

Practice Purchase Goodwill Loan Asset coverage? Value? Cashflow Projections? Financials? Contract of Sale? Insurance? Lease?

Practice Purchase Equipment Loan – Lease? Schedule of Assets? Book Value? Owned? Age/suitability? On-costs/maintenance?

Practice Purchase Goodwill loan - $200,000 Equipment Loan - $50,000 Line of Credit - $30,000

Practice Purchase Loan AmountTermInterestResidualPayment GW $200, months11.5%$0$3, Equipment $50, months9%$2,500$ Line of Credit $30,000 Ongoing10.4%$30,000$ $4,699.34

Servicability Establishing the capability to pay a loan Net profit Salary Add-backs Current Commitments New Loan Surplus

Serviceability Interest expense Depreciation Salary Superannuation Donations Leasing/Hire Purchase costs

Serviceability

Exercise 1 The new loan will be $3,500 per month in repayments Existing business loans are $57,921 per year Home loan is $50,000 per year

Living expenses = $250 per week Car loan = $81 per week Car on-costs = $100 per week Lunches/mags/going out = $220 per week Balance $41 per week Credit Card Interest = $29 per week Debt free in 8 years!