How To Split Your Assets, Business And Cash-flow To Protect Against Bank Actions

[Marc]

Let me tell you a story you may have heard before:

Your business overdraft is secured by your home. You also have a housing loan with the same bank of course – there isn’t any other way to do both. Your credit cards are there, including your business credit card. You have a lease or chattel mortgage with their Asset Finance division and for good measure you even sorted out your insurance with the same bank. Thank goodness it was all so easy.

But then, your revenues start to fall. Expenses don’t. You can’t afford to lay off your staff, they are making both the sales and the producing product. It’s as lean as it can be, and it seems to be getting better.

In the meantime, your clients are extending their payments from the usual 45 day payments out past 60 days. You soaked up all the equity in your house just to keep going and according to the valuers, real estate agents and banks, prices are not getting any better.

Read more: http://businessblogs.co.nz/2010/11/0...n-tough-times/

[buxlo122]

Sounds like you are buggered.

[Keithw]

Some good advice in that article.
It illustrates a major reason that small business struggles to get funding in NZ, the Banks want their hands on everything you've got because no-one will lend money on a business alone, regardless of how profitable. Hence the reliance on property for security, and also therefor a worry for the banks if property values go backwards too far & leave borrowers under water. (ref thread on banks drip feeding mortgagee sales to try to stop a massive drop in all the rest of their securities).

[Winston001]

.... the Banks want their hands on everything you've got because no-one will lend money on a business alone, regardless of how profitable.

Yes and that is because the business is worthless. Imagine lending to Blue Chip or South Canterbury Finance. Very profitable businesses. Or to a real estate agency.....

Grandma has always had her life savings in the bank. One day the bank writes apologetically and says her term deposits are down by 80% because the management decided to make business loans. Secured by grateful business owners who promised to pay......

Businesses can get money. Either secured by real estate, or second tier lending against chattels. The real problem we have is seed capital for new ideas and that is always hard to come by.

[roseneath_rat]

... the Banks want their hands on everything you've got because no-one will lend money on a business alone, regardless of how profitable.

Not entirely true, especially for franchise related businesses. Business with strong enough balance sheets & cashflows will be able to secure some funding without property security but will be relatively limited.

The unfortunate truth is that small businesses still have a high failure rate in NZ, and business owners have highly inflated ideas of what their business is worth in the cold light of day. A business that is struggling has very limited appeal for sale as a going concern, and the quality of assets for a failing business is usually poor.

Seeking to deliberately separate your assets away from your borrowings raises the spectre of moral hazard. If you have less to lose by failure you are also more likely to take higher risks & speculative investment thus a higher rate of default on loans. Why would a financier lend money to your business if you weren't willing to back it up with your own assets?

If you want a lender to share your business risk, then expect to share the business profits.

[fpl]

If you want a lender to share your business risk, then expect to share the business profits.

What do you mean. Really???

[eri]

at a guess

if you want a business loan at 8?%

expect the bank to want it to be as safe as possible by securing it against your home

if you don't want to take that risk, why should the bank?

so expect to have to pay 10% or higher for an unsecured loan, depending on the risk

[flyernzl]

Two university students of Indian descent resident in the USA devised a method of instant messaging over the internet.
With no assets of their own, they were able to raise sufficient finance to form a company and get their system working.
They sold out to Microsoft for squillons of dollars.
They and their backers were able to retire on the proceeds (if they choose to).

Two university students in New Zealand come up with some breakthrough idea.
They go to an NZ Bank to get the finance.
The Bank immediately starts to talk real estate as security.
Imagine how far the students are going to get.

And then we wonder why our country falls behind in the world economy.

[whitt]

I think the government in NZ should develop a policy to encourage entrepreneurs or inventors.

These are a couple of areas NZ could do well at history has shown

[CJ]

Two university students of Indian descent resident in the USA devised a method of instant messaging over the internet.
With no assets of their own, they were able to raise sufficient finance to form a company and get their system working.

New Zealand is actually developing a good angel network for new tech businesses.

It is non tech businesses that will struggle as the chance of super returns are not there so Angels aren't willing to take the high risk.

[Marc]

This article also makes interesting reading "Why most Kiwi businesses won’t turn their good ideas into world class commercial results" http://businessblogs.co.nz/2010/10/1...rcial-results/

[speights boy]

We will know in 5 years time whether NZ has made the correct decision in regards to keeping this company here.

Jetpack needs $5 million to take off

Mr Martin was not seeking funding just yet, but was assessing investor appetite before the board decided whether to launch a full prospectus or look at other funding options, such as private placement.
Mr Martin said many New Zealand companies struggled to achieve this next step.

http://www.odt.co.nz/news/business/126968/jetpack-needs-5-million-take?page=0%2C0

[CJ]

We will know in 5 years time whether NZ has made the correct decision in regards to keeping this company here.

Jetpack needs $5 million to take off

Mr Martin was not seeking funding just yet, but was assessing investor appetite before the board decided whether to launch a full prospectus or look at other funding options, such as private placement.
Mr Martin said many New Zealand companies struggled to achieve this next step.

http://www.odt.co.nz/news/business/1...ake?page=0%2C0

This is really an angel or Venture capital type investment. Angels make investments expecting 5 out of 10 to fail, 4 out of 10 to make no money and hope that 1 out of 10 will make it all worthwhile.

A bank shouldn't be expected to fund this as the risk of failure is too high - only an equity investment makes it worthwhile.

[speights boy]

I agree CJ, that is exactly what Mr Martin says: more VC or an IPO.

I just hope that either NZ continues to provide the venture capital for this, or supports an IPO; and that it doesn't have to go offshore.

I would buy a couple of shares.

[CJ]

I agree CJ, that is exactly what Mr Martin says: more VC or an IPO.

I would buy a couple of shares.

I think this is too early for IPO, the risk of failure is too great.

A comparison, without the potential upside, is the Hume supercar which failed with its IPO - I am surprised Colin Giltrap and other rich NZs didn't invest money into it - I can only assume that means they thought it wasn't a good investment.