December 2013 - Newsletter

Exit Strategy
What is an exit strategy?

How can you successfully exit a business with very little accrual value? This is a question a lot of asset finance brokers have to deal with. Here is how some brokers are working themselves into the driving seat.

A decent exit strategy is easier to build than you realise.

You've worked hard to get to where you are. Most brokers in the asset finance industry have had to pilot their way through changing laws, tighter compliance requirements as well margins being eaten into by increasing compliance costs. Business changed for many operators with the GFC, a number of funding lines vanished and the base support or loyalty to brokers quickly dissipated. Its fair to say that those of us left in the industry are professional and consider our part in the process of building credit relationships as a career.

Positive moves in the market place are encouraging more competition. Sensible governance is also taking control of fear and pushing market activity. All good news. Some of us look in the mirror in the morning and tell ourselves it's time to get busier, others of us think our time is more important and might prefer a day on the water fishing or a quick game of 9 holes.

If you're at the point where tide patterns are more important to you than GST changes to Hire Purchase then this article is for you. G&H Financial are a business that in effect operates primarily as a back office operation. We do all your work, just as if you have a centralised office. Working off as little as a name and number we can turn some of the hardest scenarios into an income stream that lasts.

How do you maintain the ownership of your database if it's diluted through a process operated by another business ? Through the introduction of Deal ID sequence and document management the source of the deal is permanently ear marked. Our monthly reporting will also help you to facilitate working with us and while you're lying on the beach with the grand kids, we'll be settling your next deal and you get 50% of the commission.

Winning Scenarios
Our winning scenario introducer will receive a complimentary bottle of champagne

1. We received an enquiry from a rural broker about a baler and tractor purchase for 185,000. The business was solid however there was a previous loss account in the background from 1987. The first application had been lodged with the funder that had the loss account on file. Subsequent applications meant that this was now a disclosed issue for the client. His business had changed from excavation and was now operating very well in harvesting and bailing. This didn't help. We spoke in length with the client and discovered a number of machines and tractors unencumbered. With the proof of good credit existing and the additional security we were able to get enough confidence inside a managed private fund we have to get sign off. We dispatched staff to inspect all the goods and 18 hours later had the deal in for settlement. Client was exceptionally happy as was the broker.

2. We received an enquiry through a vendor of ours that runs one of Sydneys' largest motor dealer groups.  The applicant was discharged bankrupt. Ordinarily this application would work well with an expensive sub-prime product. Through research and client conversation we established a good reason to build for an approval under an A rated bank product. The client and vendor were very happy with the result and short turn around.

3.  A broker through a registered mortgage panel sent us an application for an excavator. The deal was incredibly difficult. Servicing was evident, however, the 2 slow accounts in the background meant that no-one wanted the deal. We worked and negotiated with the client to take security over existing equipment and raise capital against these machines. This meant we could split the 120,000 into 2 separate loans of 60k each, our private funder wrote the first 60k and this gave us a strong Loan to Value ration which made it easy to allow for a commercial fund to pick up the deal with no risk. Client was happy and will start work in the New Year with his brand new machine.

 

November 2013

It's not a conspiracy theory but hard to read risk has killed asset 101


The asset finance industry in large is quite easy to understand, in times gone by it has been easier. What has changed ? The variables, all the hard rules of loss or asset depreciation have changed, risk is a bit harder to ascertain.

Changes in the industry have nothing to do with liquidity problems. Credit appetite is another variable that comes and goes. The real changes in the asset finance industry has more to do with a faster changing business environment. Hard lessons have been learnt in process too and the only changes we experience are changes that are entirely necessary to protect the industry in large.
  • Assets have become harder to take a position on with globalisation and aggressive market competition in certain sectors, concrete pump equipment is a good example of this with low cost manufacturers rushing into the market, some of them are also offering their own finance with no true credit methodology.
  • Uncertain economic variables since the GFC makes a lot of basic data invaluable and has made real time data a better way of measuring risk and overall business success, lodged financials, bank statements and a clear tax portal are almost a given requirement for non car transactions
  • Previous credit and current credit references are not always the only consideration, payments to creditors by measurement of an aged creditors and debtors report is also a telling sign.

Money Shots

For an up to date visual on some of the assets we have funded and to follow our National Broker Manager ( Robert Grul ).. we recommend that you check out Money shots by R Grul G&H Financial.
https://www.facebook.com/pages/Money-Shots-by-Rgrul-G-H-Financial/304705566334292?fref=ts
Asset 101

Scenarios

There were a few interesting scenarios this month.


1. We were approached by a well know franchisee requiring fit-out finance, due to adverse credit in the background it was difficult. We were able to fit the deal in under a vendor product that allows for a credit limit of $110,000 under agreement. The deal was approved in a week and the client was able to secure the site prior to loosing out on a very valuable opportunity that would have cost him a lot of money.

2. Approached by a high worth planner with a client that needed to refinance an existing machine along with commercial bills. We were challenged with managing a court judgement against the business and the inability to illustrate servicing. Thanks to the multiple beneficiaries listed in the trust we were able to mitigate servicing through add backs in large due to a contributing member that was earning additional income outside of the company but still contributing.

3. Super cars are not the desirable assets that they once were and most lenders have very strict guidelines around funding for these vehicles due to the high value and as such associated risk they carry. We recently settled a Lamborghini for a young gentleman starting a new business.

4. Balloon residuals that fall due but can't be refinanced due to the history on the account quite often have to be sold or fall into serious default due to the difficulty of refinancing these assets. Recently we funded a balloon residual to take out the final payment against an account that was out of order for a large period of the term of the contract. Credit had the deal presented including the ledger and were happy to accept the deal on a 12 month term with the option to extend if the account is kept in good order. The clients culd continue business as usual with the equipment necessary to do the work.

October 2013

** There is no secret to success..
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** Recently meeting up with one of our preferred business partners.
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A true partnership in the money lending and broker business is built over many years and there is really no shortcut to any relationship built inside our industry. We feel encouraged and at times privileged to be working with our business partners. Day to day trade is never without its normal challenges, however the strengths inside having developed strong partnerships on the basic rules of transparency shine through.

A lunch meeting or general catch up is always a great way to enforce your commitment to your lender and his business. A recent meeting with one of our lenders Director of Funds led to some interesting conversation and he reiterated some of the basic rules of engagement which definitely rang true.

1. Don't force a relationship, either your business fits with a referrer or it doesn't, the way you do business won't please everyone but will work with the people that matter

2. Find your own niche, business is never easy but inside everything we do is something that we are particularly good at.

3. Work on quantity and then tweak it and create the performance control through managing the best out of what you have created. In other words knock on a lot of doors but focus your energy on the people that prove to be interested in you and your business.

4. Don't feel like you've failed because there are business that you can't connect with or businesses that can't connect with you. It's a numbers game.

http://www.arcashflow.com.au/intention-technique-important-meeting-client/11362

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1. Logistics

We were approached by a private and commercial moving company with a high social media presence that was seeking to fund a truck. Difficulties in their business in 2011 and 2012 with a heavy payroll leaning on profits limited their ability to service the loan on paper. Even with A rated credit in the background and a well illustrated ability to meet commitments the deal was still challenged by no evident property ownership.

After a meeting with our private funds manager we were able to get around the illustrated servicing issue based on historical data with the use of bank statements. The deal was agreed on in principal and approved

2. Scaffolding.

 

A spectacular success for one of our preferred clients. We received a request for funding to acquire Scaffolding. Traditionally this equipment cannot be funded without additional security but this was not available for this transaction. we obtained approval from a first tier bank underwriter to provide the facility as a chattel mortgage. At settlement there was another hurdle! This was due to the fact there was no coding or serial numbers on the scaffolding, after discussion we settled with no barcode or serial numbers on the asset.

3. IT Equipment.

A new start business involved in the broadband roll out program was referred to us by a valued referrer. New start business or ventures have been a challenge and in recent times additional tightening in the credit space which some might attribute to bleak economic forecasts by media and analysts alike have only made it harder. We worked on firm contracts and projections, this along with clearing up an anomaly on the credit file around current and previous addresses we were able to move forward. Approval was obtained in three working days for a business that is only 1 month old.

August - September 2013

** Scenario - Wine Bar
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We have been involved in a project to assist in a new start wine bar. Small function type wine bars have become very popular in the lower north
shore. In this particular scenario the applicant was new to the industry, the combination of a new start business along with an inexperienced
operator was never going to be easy. We arranged a face to face with the client on behalf of their accountant and discussed the applicants idea
and business plan. The meeting was encouraging and given new information around the son being involved in the business there was an opportunity
for us to work on this fit-out.

We divulged the experience of the son that would be involved in the business on a day to day management basis and along with the Mother and
her experience in accounting we were able to ascertain a clear and viable business idea with a fresh approach. We built the deal along with costing,
projections and increased security through the implementation of a bank guarantee. We had a meeting with credit and discussed potential considerations.
Having raised all necessary questions we then re-visited the client.

We worked closely with project management to get this up to settlement and are comfortable in our client and this project and look very to seeing them grow
a very successful business.


** Haven't worked with us yet ?
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If you've never worked with us or you aren't sure why you receive this e-mail then this should help. We are a speciality broker consultant business in North Sydney and Queens Road, Melbourne. We work as a back end office for mortgage consultants, accountants and vendors. We pride ourselves in taking time to meet applicants and collate all documentation when requested on your behalf. We work with you on transactions you don't have time,staff or desire to work on yourself. We vet, build and lodge applications and then progress to sign up and settle in a seamless process. You get paid the commission as normal.

Contact us by phone (02) 8060 3530 or e-mail info@gandhfinancial.com.au (mailto:info@gandhfinancial.com.au)

** Truck Finance
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We were recently involved in a very strange transaction involving an error at settlement. The loan involved 2 securities, one being the truck from
auction and the second being the tipper body. The contract had passed settlement however on payment of the second invoice it was discovered
that there was a change of vendor for the body. On closer scrutiny the invoice for the body was directing payment to a 3rd party account which made
the deal impossible to bank. The problem was that the company that built and supplied the body was a partnership and they had entered into
a dispute between each other, this meant that the partner that had built the body didn't want the funds paid into the company account. Extremely
unorthodox.

Due to the circumstances with half of the settlement paid on a satisfactory invoice and goods being released their was a reasonable dilemma whereby
the contract remained open, the client paid full payments yet could not pay the vendor for the truck body. Internal bank found this very difficult as it put
the transaction outside of standard compliance. We discussed the scenario with our private funder and in consideration they were happy to pay out
the contract and reimburse the body builder with a stat declaration to establish clear title.

We flew up to Gladstone the following day, inspected the truck, had the documents signed and the contract was settled the following day after 3 months
of deliberation. The clients were very happy and the payments were lower than the contract we paid out.

Don't forget we have moved. You can write to us or visit us at:

Suite 2.02, Level 2 / 83 Walker Street,
North Sydney NSW 2060.

Thank you to everyone that supports us along with all our
valuable business partners.

New Financial Year 2013 - 2014 - July Newsletter

Roll the dice....

The biggest change for business this year is still unfolding on the global stage. Central banks worldwide have announced their movement away from subsidising rates and the supply of historically low rates. The impact and on-going evidence of the Global Financial crisis and the wrecking ball of destruction that started in the United States of America and spread globally continues to play an important part in events currently taking place.

The move by Central banks to tighten lending does signal a confidence in the markets to manage themselves and a return of basic economic management whereby open markets have the ability to control their own stability once again.

Australian Reserve Bank rates probably stand to sit still while larger economies increase their rates. Australia has held it's ground on Central Bank rates while everyone else kept lowering their rates. The net effect has produced an over priced dollar. Therefore this rate adjustment will have a two fold effect whereby local industry can recover some lost ground in production and export, however, it will expose the true rate of inflation in Australia of which we have been protected from due to the high dollar value.


**
Scenario - Lashings Brighton Le Sands
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Finance for a new franchise venture: Recently we were approached by one of our referrers with a new start franchise venture fit-out. The business is a very well presented BBQ Chicken, Meat and Salad bar style take away business with a fresh appeal. The total fit-out cost was $150,000 and our underwriter issued an unconditioned approval with no deposit or additional security required. The site visit, client meetings and subsequent credit queries were all turned around and completed in a couple of days.

The clients and referrer were very happy and the client has indicated that the referrer will be their choice of referral for the additional franchise shops yet to be built and currently in planning.

A partnership like this one not only gives the client comfort in his own franchise business plan but also offers the security of an on-going consultation process with alternative options, a sound fall back support system and fast decisions that enable them as business owners to make the necessary choices to keep the model moving forward.


**

Five Deals for Five Stars

------------------------------------------------------------
Our promotion for this month:
Introduce five deals for the month of
July and receive a week-end stay in
Sydney, Melbourne or the Gold Coast
for yourself and a partner. Flights and
accommodation all included for 2
nights away..Enjoy the city lights or
send a friend that needs a much
deserved break. Celebrate the
beginning of a new Financial Year
in style.

For brokers choosing to spend their
week-end away in Melbourne or
Sydney we will also include a meet the
management dinner as part of the offer.


** Charity Auction
------------------------------------------------------------
G&H Attend the Hymans Auction:
In our line of business
an opportunity to meet
other industry professionals
and associates is always a
plus. The Hymans political
lunch for charity has to
be one of the stand out
events of the year.
Our congratulations
to Ian Hyman and Bibby
Financial services on an
exceptionally organised
event.


** Moving address
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Moves & Changes:

Our move to North Sydney signals a strong transition in our business and we
have all welcomed the move to bigger premises in a location central to where we currently operate
most of our business anyhow.

The move also signals important changes to our business management platform and in store changes that we all feel will add value to our current partner and associate relationships.

** In store operations
------------------------------------------------------------
General Changes:
Our move to new premises is also coupled with internal changes that we feel will help improve how we work with our partners and associates. The introduction of a seamless compliance, document and work flow process management system will not only make it easier to operate and do business with us but it should also help to offer your clients a better service experience.

February 2013 - 2nd Edition - rates to rise #$&%*

Scenarios


Welcome to the 2nd edition of our monthly newsletter. There is a lot of speculation about rates being held or the possibility of the next sequence of rate rises following through from the big four as opposed to the Reserve Bank. The bare bones of the matter is that business is still reserved and whilst we bumble along under the power of a two speed economy it certainly doesn't mean that the local economy or the global economy are kicking any large goals. In the states Obama has made a commitment to cut the level of extreme poverty, you'd hope this is pushed through by the means of austerity or better still a Hoover style 5 year plan to boost public spending without printing money. Everything considered no matter what rates do this year we can be assured of one certainty what comes down must go up.

Amongst the business as usual there were some exceptional scenarios to note. In January we had a larger amount of enquiry however a lot of this carried through for settlements in February.

SCENARIO 1

We were approached by a large retail supplier looking to fit-out their store with new shelving, point of sale signage and equipment. The vendor had a considerable amount of cash security however couldn't offer a second mortgage on any property and wasn't asset backed by any landed security. Within a week we had covered all considerations, talked to the suppliers, collated invoices and produced an unconditional approval on the basis of the cash at bank to be used as a deposit.

SCENARIO 2

A local landscaper had problems with his truck over Christmas and needed a new one urgently for a very large contract he had just received. The applicant had multiple defaults and the truck was above 4 tonne ( meaning that we had to consider a full tax return ). The financials showed a limited amount of servicing and as he was a sole trader there were also very few add back considerations. With further investigation we had information around tenants that lived in a property connected to a commercial nursery they owned and ran. The rental property positioned on their commercial land was bringing in an additional income under a different entity and we were able to provide the proof require for servicing that got the truck approved. The client was very happy and enjoyed his family time with one less stress.

SCENARIO 3

We were approached by a small excavations company that needed an additional vehicle in a hurry. There were no financials and a few other credit considerations that meant we needed to place the funds with a private lender. We had the approval through within three days of receiving the required supporting documents. The client was contacted with the good news. The vehicle was a private sale so one of our team members was dispatched from Sydney to Queensland to inspect the vehicle and sign the documents with the client on the same day. The loan was settled and the client was very happy.

In the read

I read in the Time magazine that
BOYZ 2 MEN a 90's R&B group, serenading a crowd in Moscow was part of Russian President Vladimir Putin's drive to reverse the country's declining birth rate. No word if they were successful

HOW DO YOU RATE ?

For February you can compete in the motor finance market with a G&H product. Send your scenario through now for a low doc or self declared income policy approval up to 75k with a rate from as low as 6.25%
( applicants must meet the desired criteria )

2013 First Edition

Who remembers 2012 ?


Undoubtedly last year may have a special place in many hearts for personal reasons. For the Reserve Bank its a year of conclusion, for the retail sector a year of reflection and to everyone’s surprise for the mining magnates certainly one they won't forget.

Possibly the best result of 2012 is that we successfully worked out the Mayan calendar is unreliable. This year hasn't started with a bang but certainly all early indications are showing that the SME market isn't slowing down. The USA seem to have a reasonable grapple on their fiscal cliff and the Euro crisis seems well positioned in our rear view mirror, what does all this mean ? Certainly most indicators point to a warming global economy. A stable global economy seems to be a tiny blip of a memory for most of us operating and working in the broker and finance markets.

What would it mean to us ? Certainly in large we have been encouraged by a very robust Australian economy but the negative media and uncertainty in the global markets aren't a contributing factor to any of the local success. A stable global economy will bring back a resurgence of value to the commodities markets, production will increase and the dollar will fall to a level that makes it reasonable enough to export and easier for our local retailers to compete on a level playing field with those retailers pedalling their goods from overseas. So all in all we're on the up and up, so welcome 2013 !

Scenarios

A stand out scenario for us in 2012 was when we were approached by a magician looking to fund an instant babe. The instant babe is a rubber doll ( without serial numbers ) used in a number of different scenarios no doubt all magical. Our client " the magician" was using the doll amongst a few other props for a big entertainment contract of which he couldn't perform without. We funded this with a non-bank lender and the client was very happy. Complete approval was for $50,000. You can watch our latex girl story here.
http://youtu.be/BbWm3x13xRc

Fit-out

For many of us in the industry the word fit-out has become a difficult subject. Last year we worked incredibly well in this sector of the market. Where you might currently find that non-broker competitors like Silverchef are taking out the market we now offer an alternative. That’s right ! We are a well established solution in fit-out. We have been encouraged by a number of large projects in the market from built in cold rooms, restaurants, cafes up to
Qantas terminal retail outlet fit-outs,  we have been actively involved in great productions.

A growing market that is equally difficult to work with has been the gym industry. Again we have worked in well with a number of new start ventures as well as refurbishments in this industry. We are able to fund new as well as used equipment from the correct vendor.

Our product remains well priced and certainly assists in maintaining your client confidence with the right solution. We work with you along the entire process and help with a step by step instruction to build a submission along with all the relevant supporting documents.

For any scenarios feel free to contact us on info@gandhfinancial.com.au alternatively call one of our friendly staff on (02) 8060 3530 or keep a lookout for our new broker site due to launch in 2013 called Loans Workshop. Watch this space.

To all our friends

I think now is a timely opportunity to wish all our friends and their family in Queensland all the best in this time of natural disaster. A special thank you to all the hard working volunteers of the SES in Queensland and New South Wales. It doesn't seem to long ago that they had only just recovered from floods. Our thoughts are with you.

2012 Final Edition

Welcome to G&H Financial News

As the year comes to an end, business activity surely doesn't at
G&H where we have experienced an upswing going into the years end. This is
not abnormal for G&H, especially as we service car finance transactions and
as a broker it is important to remember that the Christmas to New Year period
is historically one of the busiest for car dealers and potentially your
customers.

1. Recent Scenarios Settled

2. G&H Offer New Car Search Product

Recent Scenarios Settled

1. We recently provided funding for a new venture smash
repairer. Their funding requirement was for $100,000 and we leveraged off their
and their family's experience in the industry to get the loan settled. The
goods were a spray booth and associated equipment.

2. Having previously approved our applicant's father for a tip
truck, we had their 21 year old son approved for $40,000 for the matching dog
trailer. This approval was settled on a low-doc, private sale basis and
serviceability was shown without financials.

G&H Offer New Car Search Product

Effective immediately you can now engage G&H
Financial to source a new car for you or your clients.

To get started all we need is the model of car they are looking
for and their trade-in details if they have one.

There is usually a $250 fee associated with this service but we
will waive the fee for your client if we are providing the finance.

Our customers who have used this service have enjoyed a
substantial discount whilst saving a lot of time which would have otherwise
been spent visiting car yards

October 2012 Edition

Welcome to G&H Financial News

Consumer borrowing was what sustained finance in September with business lending coming to a near halt in early September. Our partners in mortgage broking, real estate, retail and hospitality have been experiencing average conditions over the last six months, and this slow consumer sentiment has obviously dampened the appetite of small business to take risk, hence our lower than usual business settlements.

Bad times always come to an end though and this has been proven by our first week of October showing a rebound in the business loan settlements.

1. FBT on Fully Maintained Leasing Explained

FBT on Fully Maintained Leasing Explained

Around once a month we find ourselves working out detailed comparisons between a standard consumer loan and a fully maintained lease for one of our PAYG clients. The calculations are very involved and a lot of factors come into play.

In our experience, the consensus with fully maintained leasing is often that the structure requires too much commitment from the client as when they sign up for a 4 or 5 year lease, they also sign up for a very negative position if they leave their employer and the next employer does not want to sign up to manage the payments for them. In addition to this, if they sell the car mid-term they will not have not built any equity into the car due to the high residual value imposed on leases by the ATO.

Fully Maintained Leasing Considerations;

ATO Calculation Method - Statutory Method or Operating Method.

In most cases looking forward, the statutory method usually calculates FBT as 20% of the car's value. In the case of a $25,000 car this would add $5000 in FBT to the annual cost to the client to run this car.

The operating method requires a log book to prove exactly what percentage of annual kilometres were driven for private purposes. If the private use percentage is 30%, which roughly equates to two days of the week being the weekend, the FBT expense on a $25,000 car is about $700 lower than the statutory method at $4300. Due to the log book requirement though, many use the statutory method.

Fixed Pricing

Fully maintained leases may appear very convenient as everything is included, though this also means that there is no room for negotiating on pricing when the car is bought, serviced and insured and choices for petrol stations are usually limited to one or two distributors.

On the other hand, some fleet companies get great discounts on new cars and pass along most of the discount to their customers.

Lack of Flexibility

A fully maintained lease being a "lease" has a minimum residual requirement imposed by the ATO. Additionally, a lease does not allow for a deposit to be made. This means that the client never really builds any equity into their vehicle which is ok if they continue to be employed with the same employer and do not have a major change in their circumstances for the 3-5 year term but if they do need to exit the contract mid-term, they will usually have to cover an amount of negative equity to finalise the contract.

Most fully maintained leases are novated, meaning the employer pays the payment and deducts the ex GST payment from the employee's pre-tax income saving the employee GST and income tax. We have had a lot of employers not willing to sign novation agreements which leaves the employee to manage their payments themselves.

If the client was to opt for a standard car loan with no residual and a small deposit, they are much more flexible as they will have built more equity into their asset and be able to exit the contract more easily.

When speaking with your client regarding this, be sure to ask them if they plan to change jobs or sell the car during the term of the loan as a standard car loan may be more suitable.

Shorthand Comparison;

Assumptions: Client is paid $60,000 gross p.a. therefore any reduction in pre-tax income will attract a reduction in tax of 32.5%.

New car price is $25,000 which includes $2,000 of on road costs which don't include GST.

Interest rate being used is 10% p.a.

Loan structure in both cases is 5 years 30%.

Standard Car loan

Monthly / Annual Payment    $430/$5160

Annual Rego and Insurance $2000

Annual Maintenance             $1000

Annual Fuel Cost                  $5200

Total Annual Expense          $13,360

 

Fully Maintained Lease

Monthly / Annual Payment     $436/$5232

Annual Rego and Insurance   $2000

Annual Maintenance               $1000

Annual Fuel Cost                    $5200

Total Annual Expense             $13,432

Less GST                                $12,211

Less reduced income tax        $3,968

Total Annual Expense             $8,243

Plus FBT (Statutory Method)  $4,600

Total Annual Expense            $12,843

Cost savings Vs Standard Loan  $517 p.a.

As can be seen above, the annual cost saving for with a fully maintained lease is negligible and when the lack of flexibility is taken into account we have always taken the standard loan option.

August 2012 Edition

Welcome to G&H Financial News

July was a very busy month for us and we capped it off nicely with our newtorking event on the 7th August. We thank all those that took part in the night, it was a great success. This newsletter, we will be covering;

1. Recent scenarios settled

2. Lending Structures Explained

3. Final Word

Recent Scenarios Settled

1. Our client had a 3 month old ABN and was not asset backed. We had an approval for them for a used private sale car, with no deposit required within 48 hours.

2. A referrer had a client who was living in Australia on a spousal visa. We settled their loan with zero deposit on a new car worth $24,000.

Lending Structures Explained

Chattel Mortgage

Chattel mortgage is a type of finance used by businesses of all structure types to purchase assets. Chattel mortgage is essentially a mortgage over goods to be financed. The ownership transfers to the borrower at sale, the finance company takes a mortgage over the chattels. Chattels refers to property which is easily movable or in other words, any tangible property other than land, buildings and other things fixed to land.

The term allowable is between 1 and 5 years, though sometimes up to 7 years. Deposits can be made in any quantity, and a residual is allowed with the residual size usually being regulated by the lender.

The borrower can claim depreciation, running costs and interest paid. An important feature of the chattel mortgage is that the borrower can claim the full input tax credit from the GST incurred immediately.

Commercial Hire Purchase

The Commercial Hire Purchase (CHP) or Hire Purchase is similar to the chattel mortgage, the main difference being the lender holds title of security until all payments have been made. This affects the borrower's GST claims, whereby if they are using the cash accounting method, they must claim the GST over the term and not in the next BAS as with the chattel mortgage.

The term allowable is between 1 and 5 years, though sometimes up to 7 years. Deposits can be made in any quantity, and a residual is allowed with the residual size usually being regulated by the lender. The borrower can claim depreciation, running costs and interest paid.

Note: Our wonderful labour government has started charging GST on the interest on CHPs, so it is more important than ever to have your client get accountant advice on CHPs as a CHP may appear more expensive than a chattel mortgage, but if the client is GST registered then the net cost may be similar or less than a chattel mortgage.

Lease

The finance lease is heavily regulated by the ATO as with a lease, the funder holds ownership of the asset and the borrower claims each payment as a fully tax deductable expense. The ATO seeks to dissuade borrowers from claiming the full value of an asset before the asset reaches the end of its life by enforcing minimum residual values which are noted below for assets with an effective life of eight years:

Minimum Residual Value - Percentage of Cost

Year 1 = 65.63%

Year 2 = 56.25%

Year 3 = 46.88%

Year 4 = 37.50%

Year 5 = 28.13%

The term allowable is between 1 and 5 years. Deposits are not allowed but the lender may sometimes allow a large first rental up to the maximum value of 12 monthly payments.

Employees often novate a lease whereby the employer pays the lease, claims the GST charged on the lease payment and deducts the payment from the employee's pre-tax income. This reduces the employee's income tax and can be beneficial, though FBT is usually due in this arrangement. Employers are often comfortable with a novated lease as if the employee leaves them, so does the lease liability.

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