Improve the Cash Flow of your Business
Factoring, debtor finance or invoice discounting
You've done the work and sent the invoice, but you don't have the money. This is particularly frustrating when your debtors don't pay on time - which is most of the time.
With factoring (also known as debtor finance, invoice factoring, invoice discounting or invoice finance), a lender gives you a percentage of the invoice (usually 80%) in cash, then the remainder when the invoice is paid. This service incurs a charge but can save your bacon in cash flow terms.
Trade finance, stock finance, export & import finance
If you've bought stock, it can be some time before the finished goods are sold and this can have serious cash flow implications - particularly for importers and exporters.
With trade finance (also known as stock finance, inventory finance, export finance or import finance), the lender gives you a percentage of the money against the stock you've purchased. Again, you pay for the service, but it can make all the difference in cash flow terms.
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Income is more important than interest rates
From recent Roy Morgan report
The Roy Morgan report highlights the importance of income, more so than house prices and borrowing costs, to mortgage stress. In fact, interest rates would need to more than double to match the impact of a loss of income on housing stress.
The previous peak in mortgage stress was in 2008-09, a period of high interest rates and bubble-like price growth in Sydney and Melbourne.
This time around, record low interest rates appear on the surface to be counter-balancing the default rate. Yet this is tied to a stagnation in income levels.
House prices and income levels moved in step until 2013. While house prices have continued to increase, household income levels have flattened since then, when the cash rate dropped to a historic low of 2.75%. The cash rate is now even lower at 1.50%.
The troubling prediction from this is that mortgage stress among Australian households is set to remain high, despite the current low interest rates and should the next move be up the situation for many householders can only get worse.
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Extract from recent article appearing in the Advisor regarding broker remuneration
Using a broker ‘was a great experience’
“Some of the findings are that consumers are generally happy with the broker’s service proposition; they like the help they get from brokers, [and] satisfaction levels are pretty good.”
Indeed, a senior official told The Adviser that he had recently used a mortgage broker to refinance his home loan. While he did not reveal who his broker was, he said that “it was a great experience”.
“They really handled all the discussions with the lender and just made it easier for me to do the whole process without having to be as hands-on as I otherwise needed to be.”
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Property is a good bet
Property is firmly in the news today with all sorts of commentary. Some negative and some positive. But if you are looking for a stable and secure investment, property is still a stable option. Far less volatile than other investment strategies, an investment property has the potential to deliver consistent rental income for years to come. While you may start out with a single property, careful consideration and management of your investments could see you grow this to a full and profitable portfolio with the help of a MFAA approved broker.
When purchasing an investment property, you need to think tactically about where you will buy and the type of person who generally resides in this area. Doing your research and having a clear understanding of the market and the areas where property is most likely to increase in value is essential. When considering your budget and return on investment, it’s not just about your rental returns, you need to factor in ongoing costs also.
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How to invest on a low income
You do not need a six-figure salary to invest in property but those who earn a lower income will require a little more creative thinking to start a portfolio. Here are some tips to help you get started.
Find an investor-friendly loan
The challenge for low-income earners is the time taken to save for a sufficient deposit. Your broker can find a lender and loan that is investor friendly.
Prove your financial discipline
Your lower income on an application can be offset by proving yourself a low risk borrower. Having some genuine consistent savings will not only highlight to lenders your ability to meet financial payments and live within your means, it is also an opportunity to increase your borrowing power. The same can be said for lowering any existing debts. Keep credit card limits as low as possible as lenders calculate servicing based on the limit, not the balance.
Choose the right property
Regional areas are where to turn to, as the entry point to the market is lower. There will generally be less capital growth, there are higher rental yields on offer.
Investing with a close friend or relative is another way to enter the market for those who earn a low income. As long as agreements are in place, including who is responsible for the mortgage how the property will be used and how maintenance will be paid for, co-ownership is preferable to not owning a property at all.
Recent research suggests that as many as 60 per cent of applicants who are rejected by the major banks would be eligible for a loan through a specialist lender.
Specialist or non-conforming loans do carry higher interest as a rule, to account for the higher perceived risk the lender is taking, but a good finance broker will see this type of loan as a stepping-stone to a prime loan, and help their client prove themselves so that they can switch to a prime loan after a year or so.
Property investment may not be as straightforward to low-income earners, but in most cases, is accessible, provided the right properties and finance products are sought out.
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What is LMI
Lenders mortgage insurance (LMI) will in most cases be payable when the LVR (loan to value ratio) exceeds 80%. LMI may be an added expense, but it offers buyers the opportunity to dive into the property market earlier, without saving up an entire 20 per cent of the property’s purchase price as a deposit. The insurance premium is a one-off payment, and you can roll it into the loan amount so that you are paying for it month-by-month along with your mortgage.
What is it?
LMI protects the bank or lender, should a home loan go into default, guaranteeing that the lender will get its money back if the property needs to be sold and there is a shortfall in repaying the loan.
While a 20% deposit generally provides a good buffer against any drops in property value over the life of a loan, LMI can also provide the same protection, meaning borrowers can purchase property with a smaller deposit and get into the property market sooner
What’s in it for you?
For the borrower, it may seem LMI it is just another expense to cover. But insurance can mean that some buyers will be able to enter the property market with, for example, only a five per cent deposit saved.
As an example, buying a $500,000 property will bring the deposit down from a 20% deposit of $100,000 to just $25,000 for a 5% deposit.
Note: Some lenders are now limiting the LVR’s on investment properties with interest only loans.
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What is LVR?
The mortgage industry is a wide, wondrous world with a language all its own. One of the many acronyms bandied about is ‘LVR’, which stands for ‘loan-to-valuation ratio’. Here’s what it means.
When you are working out what amount you can borrow to purchase a property, the size of deposit you need to save and whether you are eligible for a particular mortgage product, the loan-to-valuation ratio (LVR) is one of the most important considerations.
In the simplest terms, the LVR is the percentage of the property’s value, as assessed by the lender, that your loan equates to. So, if the property you want to purchase is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is 80 per cent of the property value, making your LVR 80 per cent.
LVR is important because different lenders and loan types have different maximum LVRs, and some lenders will only lend up to a certain LVR for properties in certain areas.
Most lenders will finance 80 per cent LVR, or higher with lenders’ mortgage insurance (LMI),
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Can I renovate a residential property I own through an SMSF?
If you’re thinking of giving your investment home a total makeover using your SMSF, think again. Unfortunately, while you and your fellow trustees have some control over your fund, it doesn’t mean you can spend your money however you like.
The ability to renovate a residential property that you own through an SMSF comes down to how you purchased it. Those who borrowed through their fund to buy the property are restricted in what they can do. Slight improvements and repairs can be made, but a full-blown renovation is saved for those who used the cash in their fund to buy the property.
If you used the cash in your fund to buy a property outright, then you can absolutely do whatever you want, provided your SMSF deed allows you to do so. You can sub-divide, you can develop, you can pretty much do anything.
Those who borrowed through their fund aren’t entirely prohibited on making improvements on their property. Repairs are allowed, but they can’t be vast alterations that change the inherent character of the property.
You can make the property more rentable by updating things, but you can’t go and completely gut it and change it. If you really want to do some renovations and you had to borrow, the best way is to go outside your superfund.
Choosing to renovate your property ultimately comes down to increasing its value, but to do so, you have to be mindful how you go about it.
Everyone wants to be a property developer, right? There’s no use dropping a whole heap of cash in a property where nothing in that street is in the same condition and it’s above the price point. You’ve got to be conscious on what you’re spending money on and what you’re doing.
Whether you’re renovating to repair with borrowed funds or doing a complete makeover with accessible cash, renovating through an SMSF is only worthwhile if it improves the return on your property exponentially. Not playing by the rules or accessing your SMSF prior to retirement for personal gain can result in hefty penalties with fines up to 40 per cent of the fund value.
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What are investment lending caps?
In an attempt to curb the high competition of the Australian housing market that locked out many would-be first home buyers, the Australian Prudential Regulation Authority (APRA) in late 2014 signalled its intention to keep a close eye on a suite of concerns, including the levels of residential lending to investors.
APRA’s communications at this time flagged an increased focus on:
Lenders were strongly encouraged to restrict their investment lending to 10 per cent growth. APRA explained that the aim of the threshold was not to target specific loan types, but to pay more attention to the cause of imbalances in the housing market: strong growth in investor lending.
After the Reserve Bank of Australia stated in its Financial Stability Review that direct risks to financial institutions would increase if high rates of lending growth persisted or were to increase further, major banks started to take action to slow their rates of investment lending, in order to avoid the scrutiny of APRA, mandated lending caps and a potential need to hold increased capital against mortgage risk.
ANZ Bank announced that they are no longer offering discount interest rates to new property investors who didn’t already have a mortgage over their own home with the bank. Both Commonwealth Bank and National Australia Bank also narrowed discounts applied to new investor borrowers.
What this means for investors
More than a year on from the investment lending growth targets being set, the property market is moderating, meaning that investors along with owner occupiers are not paying the astronomical prices they might otherwise have been, particularly across the capitals.
While investment lending is now not as simple to secure as it has been, it is by no means impossible, and brokers with access to a panel of investor-friendly lenders are well placed to help.
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Refinancing traps to avoid
Whether you’re after lower repayments or want to tap into the equity sitting in your home, refinancing can offer a world of benefits. Here are some things to be aware of so that you don’t find yourself hooked into a bad deal.
Don’t be fooled by the interest rate
Finding a lower interest rate doesn’t necessarily mean you’ve scored yourself a better deal. In fact, a product with more features may cost you a bit more in fees or interest, but could save you more in the long run. Including features such as an offset account will prove valuable as it will allow you to make larger repayments or put any extra cash against the loan. Products without this feature may charge a fee for early repayments.
Honeymoon rates are just that
Don’t be lured by offers with discounted introductory rates unless you’ve calculated the savings over the life of the loan. While a loan with a discounted interest rate seems a tempting offer, it’s only temporary. Once the introductory period is over, the interest will revert to a higher standard variable for the rest of the loan term. It may be more beneficial financially to negotiate a lower interest rate without an introductory discount.
Be aware of the fees
One of the main purposes of refinancing is to lighten the financial burden, however, that doesn’t mean that it’s not going to cost you. There are many fees involved, which may include discharge and application fees, a valuation fee, land registration fee, and mortgage insurance. You may also be subject to stamp duty depending on what state your property is located in. While these cannot be avoided, you have to ensure that the costs involved are not higher than the savings, to make the process worthwhile.
While there are traps to avoid, a little expertise can take the stress out of refinancing to save you thousands, fund that renovation, or simply find a loan that suits your life a little better.
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Finance Broker or bank? What can a credit adviser do for you?
When you’re looking for a home loan, you could go to a finance broker or to a bank. While a bank will only offer you its own products, a credit adviser is an industry expert who will take the guesswork out of finding the mortgage product that suits you and your needs. It’s understandable that finance brokers are now the number one choice for consumers who are seeking a home loan or to refinance an existing loan. Businesses are also engaging finance brokers to help them with their finance needs from car and equipment leasing to loans to help their businesses expand.
Finance brokers already know the industry, the lenders, their products and their requirements, saving you a lot of time and energy on research. They will also put the time into finding out about your credit situation and have a wealth of experience to draw on to help you simplify it.
Translate industry jargon
Finance brokers can make sense of what loan documents and lenders are saying – put it into lay-person’s language, so to speak.
Get you what you want
Advisers will determine your borrowing needs and fiscal ability, and choose an appropriate product to suit your requirements.
Give you a broader choice
Being brokers, finance brokers must offer a larger selection of loan products. While a bank can only offer you its own products, finance brokers can help you choose from a selection of loans provided by different lenders.
Help you compare apples, oranges and the whole fruit basket
Finance brokers have the knowledge and tools to compare often hundreds of products and you get a loan suitable for your circumstances and needs.
Find you a good deal
Loan providers are always spruiking a special deal or two, and these could make a big difference to your repayments or success rate. A finance broker will know which of the deals on the market at the moment will be appropriate for you.
Act as your advocate
A good finance broker wants the best for you, the client. They will be your cheer squad, middle-man, team player and coach throughout the process.
They’re in it for the long haul
A finance broker won’t just love you and leave you – they will oversee and manage the loan’s progression right through to the end on your behalf. By the way, ‘the end’ isn't when you sign the documents and buy your property; you can expect your finance broker to keep track of you and your changing needs, helping you should you need to switch products or wish to purchase another property.
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Car finance for businesses
The preservation of working capital and taxation benefits are two big draw cards for businesses looking to finance staff vehicles.
Companies the world over are often faced with the costly requirement for staff cars. However, with the number of financing options on the rise, many business owners are turning to funding these purchases rather than paying cash.
Financing, rather than buying outright, enables businesses to take advantage of two key benefits: greater control of cash flow and working capital, as well as various tax benefits.
The preservation of working capital is a key benefit for business owners when comparing financing against paying cash for staff vehicles
A business owner needs to consider whether their working capital is better spent on other aspects of the business, such as paying debtors, advertising or even purchasing more inventory.
Some businesses may even be able to invest working capital and achieve a rate of return that exceeds the interest charges associated with financing.
The taxation benefits associated with financing staff vehicles is another key reason why businesses are turning to financing options. Of course, there are many different types of finance, each offering different tax benefits, as well as the luxury tax threshold to consider, so tax advice is strongly recommended.
In certain circumstances, the financing of business assets provides a business owner with an opportunity to claim various tax deductions, such as rental payments, interest payments and depreciation, thus minimising the amount of tax payable
Going down the financing route can be cost-effective, and with expert advice it can also be pain-free when it comes to paperwork. Some businesses can arrange finance for a vehicle without the need for financial statements.
With a standard application taking no more than 20 minutes to complete motor vehicle finance as an integral component in providing a holistic, comprehensive service to customers
What’s more, with interest rates at all-time lows, the decision between paying cash and financing business assets should be an easy one.
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When should I find a finance broker?
Saving for a home? If you haven’t met with a finance broker yet, you’re doing it wrong. Here’s why:
More importantly than just being allowed to provide these products, an MFAA Approved finance broker can help you work out whether they suit your situation and goals. For example, while buying land now to build on later lowers the cost of your initial investment and can be an opportunity to take advantage of a dip in land prices, there is no point in it if you will not be able to secure construction finance down the track.
Speak to Safe Future Finance, an MFAA Approved finance broker. We can help you take the first steps to owning your home.
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How to pay off your home loan faster and save big bucks
Reducing the life of your loan isn’t difficult; there are many simple things you can do to cut years off your mortgage. Here are some tips that will help you be mortgage-free sooner than planned.
One of the most obvious ways to pay off your home loan quicker is to make extra repayments. Depositing lump sums, such as a tax return or work bonus, will always be beneficial, however it doesn’t always take large amounts or windfalls to make a substantial difference – planning for regular, small cash injections can have a great impact over the life of a loan. Let’s say we give an extra $50 a fortnight on a $500,000 loan, that saves you $32,000 of interest over the life of the loan which in turn will save you just over two years. That’s only $25 a week.
If you find that you don’t have the discipline to make extra repayments, then simply switching your payment structure can also help save years off your mortgage, as well as simplifying your finances if you are paid fortnightly. Because there are 12 months in a year but 13 four-week cycles, by switching your payment intervals from monthly to fortnightly, you are essentially paying off an extra month per year.
Ensuring your loan allows extra repayments without penalty will let you to make the most of bonuses or funnel small extra payments to reduce the loan principle more quickly, saving on interest immediately, while an offset account will use your savings or living expenses to reduce your principle, while still allowing you to access these funds from a transaction account.
Paying off your home loan faster isn’t difficult; however it does require financial discipline and expertise in ensuring the right loan features are in place.
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How a health check can broaden your property horizons
A simple home loan health check led two borrowers to refinance for a saving of $7600 a year in interest.
When the applicants were looking for a home loan, they thought the choice was obvious. They secured finance through the same community-owned bank most of their colleagues used, bought a house and were happily paying it off.
A few years on, and knowing that their interest rate was a little higher than others they had seen advertised, they talked to an MFAA Approved Finance Broker for a home loan health check.
Being members of a mutual bank they thought they were being looked after and thought they were on quite a good deal, their finance broker recalls.
This wasn’t the case though. Although they had always received good service from the lender they had been with for nine years, they were on an unnecessarily high rate that was costing them both money and years on their loan.
They were able to reduce their rate significantly, and ended up saving $7600 a year in interest. And the loan was only $450,000 – it wasn’t a big loan
The couple had two options: they could either reduce their repayments and have an extra $7600 each year to play with or to save, or they could keep their repayments at the current level and pay down their loan more quickly.
They had a family as well, so the money could certainly be used elsewhere, but the aim for them was to pay their loan off as soon as possible, so they continued to make the same repayments, and have been able to reduce their loan faster.
Being able to reduce the debt significantly sooner than they originally planned means that the couple is now working towards purchasing an investment property.
The plan is to reduce their debt first, and then be able to put funds aside for an investment purchase. They are absolutely on track to achieve that
They are a fairly typical family, and thought they were on a reasonable deal. It wasn’t until they asked for a home loan health check that it was possible to show them that there were significant savings to be had by looking at an alternate lender.
Ask us for a free home loan health check and see if you can save
Why Would I Refinance My Mortgage?
5 Reasons why it makes financial sense to do so.
Heard about mortgage refinancing? In the past, most people who took out a mortgage doggedly continued with it until they had paid it off. These days, people refinance their mortgage much more frequently. The average duration of a home loan in Australia now is just 4-5 years. Here we look at some of the reasons people in Australia refinance their home loan.
The most common reason for people to refinance their mortgage is to get a better deal. But be careful you don’t become interest rate-fixated. When you refinance your home loan, you need to consider fees and charges as well as the interest rate. You often have to pay charges for exiting your current home loan, plus charges for taking out the new mortgage. You need to be sure that in refinancing your home loan that you’ll be better off in the long run after taking into account all costs.
Many people only discover the full details about their mortgage when it’s too late. They try to do something and get told by their lender that either they can’t do it, or they will incur a hefty charge if they do. An example is a redraw facility – the ability to pay extra money into a mortgage and then redraw it later. This feature is not possible with a basic home loan, so many people refinance their mortgage to give themselves this sort of increased flexibility.
If you carry out renovations, it often makes sense to refinance your mortgage and take out a construction loan so you only pay interest as building progresses. Once construction is over, it might make sense to refinance your home loan again so that you consolidate the total amount you owe into a loan that minimises your interest bill, while giving you a degree of liquidity.
Over recent years in the property market houses have appreciated at a significant rate. e.g. a home you bought for $300,000 five years ago, might now be worth $500,000. Refinancing your mortgage with a home equity loan might let you tap into that extra $200,000 equity.
Some people find they have borrowed more than they can comfortably repay, and they’re in danger of defaulting. There’s no shame in that. But don’t suffer in silence. If you’re having trouble making your mortgage repayments, talk to your MFAA member about refinancing your home loan to make it more manageable.
We can help you find out whether it would make sense for you to refinance and what the costs would be and what benefits you would get
Shocking survey reveals mass ignorance regarding interest rates, credit cards and personal loans
74% Of Aussies don’t know what a comparison rate is, a survey by ME bank has found.
The statistic emerged in a study of the financial literacy of 1500 adults of all ages. 57% of participants did not understand that banks determined actual interest rates, rather than the RBA or other institutions, whilst 36% didn’t know that reducing the length of a loan reduces the amount of interest paid.
35% of those surveyed admitted they’d done nothing to educate themselves on banking products. Some Aussies fail to educate themselves because they find banking dull and complex and think they know best, while others find working with numbers difficult and put their head in the sand.
Brokers working with first home buyers, highly geared investors or non-conforming clients will find ME’s results particularly disturbing.
42% Of those surveyed did not understand compounding interest and thus the reason to be patient with savings. Almost three-quarters of respondents did not realise that repaying a credit card at its minimum level could mean the debt would take decades to pay off.
In addition to the difficulty of understanding who sets interest rates, 41% of participants were wrong about what determines their interest when presented with options such as credit rating, secured or unsecured and length to repayment.
There was also mass confusion over the role of lenders mortgage insurance. Just 20% of those surveyed realised that LMI does not cover the borrower if they were unable to keep up repayments.
28% Of those surveyed had spoken to a professional advisor, a category that includes brokers.
Other methods used to learn about finance included reading information on websites, news and comparison sites (40%) and talking to family and friends (19%). Only 7% had attended workshops, seminars or completed online courses.
Even though a home loan will probably be the largest financial transaction they undertake mortgages were not a huge area of concern for those surveyed with an alarming amount even unsure of what rate they were actually paying for their home loan.
Looking for a business loan? While SMEs account for 97 per cent of Australian businesses, it can still be difficult to make a case to a bank when looking for finance to start a new business or invest in the growth of an existing one. The good news is that applying for commercial finance through a bank is far from the only option. Securing finance is imperative for a business’s prosperity. MFAA accredited brokers can assist with business planning and finding the right type of finance to support growth and success.
Why your business loan was rejected
Due to the risks involved, strict guidelines are imposed on business finance, so securing approval can be difficult. Here are a few mistakes to avoid to increase your chances of approval.
Not knowing your credit score
Many consumers may not realise the importance of a credit score. Not only is it taken as a reflection of your ability to make repayments, it also highlights your financial history which is why understanding what it is and how it can be improved can be vital. Sometimes a business can be oblivious that they have a credit default until it was time to apply for the loan.
Lack of planning
Understanding the assessment criteria and having a well-prepared application increases your chances of approval. The key things to be aware of when it comes to your application are a healthy debt to income ratio, existing business assets and a justified cash flow position. This ensures that the lender has a full picture of what has happened and what the future forecasts are.
Aside from providing financial statements and forecasts, be prepared to discuss the purpose of the finance and how the business will service the loan. Business owners need to articulate how they are going to use the capital and demonstrate how repayments will be made.
Longevity in a business is what lenders want to see and a good strategy supported by financial statements must be in place, and those statements should be geared towards demonstrating strong earnings. Many businesses are focused on minimising taxes and not maximising earnings. While there are tax advantages, not managing your business in order to demonstrate maximised earnings can have a negative impact when it comes to applying for a loan.
Not having the right advice
Surrounding yourself with industry experts can provide you with a solid understanding of what needs to be included in your application, and a good equipment and commercial finance broker can match you with the right loan product. A good broker understands that running a business can often leave you with little time, so ensuring you have someone qualified and trustworthy to do the legwork can be the difference between a success or decline.
5 Rules for your business plan
Preparing a detailed business plan will inform the lender about your business proposal so that it can assess your application as favourably as possible.
Prepare an updated business plan to establish all of the factors in your application, including any partners and strategies.