Business Use
Fine Print on Business Loans, Business Overdrafts
How are business loans regulated compared to consumer loans?
- Consumer loans are regulated by the Australian Securities and Investments Commission (ASIC), which ensures certain protections and transparency. In contrast, business loans are not covered by ASIC regulations. This means there may be fewer protections and different terms compared to consumer loans.
What should I be aware of with business loan terms?
Here are key points to consider:
Repayment Terms: For example, a business loan of $50,000 over 60 months with monthly payments of $1,000 will result in a total repayment of $60,000. Banks expect you to repay this full amount regardless of the loan’s early repayment or final settlement.
Interest and Charges: Business loans can include various additional charges and conditions. For instance:
- Some lenders retain 100% of the unpaid interest if you decide to pay off the loan early.
- Other lenders might charge extra fees for additional repayments or retain a percentage (e.g., 30%) of the unpaid interest.
Transparency: It is crucial to understand all terms and conditions associated with a business loan. While many lenders have different practices, I strive to be transparent about all potential costs and fees involved.
Long-Term Use: Most business loan borrowers tend to let their loans run to the end of the term, which can affect how these charges impact you.
How can I avoid unexpected costs with a business loan?
To avoid unexpected costs, ensure you:
- Read and understand the loan contract thoroughly.
- Ask the lender about any fees for early repayment or extra charges.
- Compare different lenders and their terms to find the most favorable conditions for your business.
By being aware of these aspects, you can better manage your business loan and avoid any unpleasant surprises.
What is a business overdraft, and how does it work?
- A business overdraft functions similarly to a credit card. It allows you to access funds up to a certain limit when your account balance falls below zero. Overdrafts typically come with higher interest rates and annual fees compared to traditional loans.
What are the typical requirements for obtaining a business overdraft?
To qualify for a business overdraft, you generally need:
- A credit score above 600.
- An Australian Business Number (ABN).
- At least 12 months of banking transactions to assess your financial history.
How quickly can I access the funds from a business overdraft?
- Funds are usually available within 2-3 days after approval.
How can a business overdraft benefit my business?
Business overdrafts can be beneficial in several scenarios:
- Flexible Financing: You can use the overdraft to cover short-term cash flow gaps or unexpected expenses.
- Peace of Mind: Having an overdraft can provide reassurance that you have access to funds if needed, as in the case of unexpected bills or urgent purchases.
- Supplementing Loans: For example, one client used a combination of a fixed loan and an overdraft to finance a new truck while waiting to sell an old one. This strategy minimized the interest paid by reducing the loan amount after selling the old truck.
Can you provide an example of how a business overdraft has helped a client?
Yes, here are a couple of examples:
- Truck Financing: A client needed $150,000 to purchase a new truck but had an old truck to sell for $50,000. They secured a $100,000 loan and a $50,000 overdraft. Once the old truck was sold, they repaid the overdraft, resulting in reduced future payments and lower interest costs.
- Scaffolding Industry: A client in the scaffolding business used an overdraft to cover payments if suppliers were late or to seize stock bargains. This flexibility helped maintain smooth operations and capitalized on opportunities.
What are the downsides of a business overdraft?
The main drawbacks include:
- Higher Interest Rates: Overdrafts typically have higher interest rates compared to other financing options.
- Annual Fees: There may be annual fees associated with maintaining the overdraft.
- Potential for Overuse: Easy access to funds might lead to over-reliance or mismanagement.
By understanding these aspects, you can determine if a business overdraft aligns with your financial needs and goals.
Business Loans Explained, Chattel Mortgage vs. Lease
How do I determine if a loan is for business use or private use?
The classification of your loan as either business or private use depends on the primary purpose of the vehicle:
- Private Use: If you use the vehicle primarily for personal travel to and from work, and you receive payslips, the loan will be considered a private or consumer loan.
- Business Use: If you use the vehicle predominantly for generating income or if you have an Australian Business Number (ABN), the loan will be classified as a business use loan.
What is a Chattel Mortgage, and why is it used for business loans?
A Chattel Mortgage is a type of loan where the vehicle (or other asset) is used as security for the loan. This financing option is commonly used by businesses because:
- Asset Ownership: The business owns the asset from the outset, although the lender holds a mortgage over it until the loan is repaid.
- Business-Style Contracts: Chattel Mortgages are tailored for businesses that might not have traditional income documentation like payslips but need to finance equipment or vehicles.
How do loan amortization schedules benefit business loans?
Loan amortization schedules provide a detailed breakdown of payments, including interest and principal, over the loan term. They are beneficial for business loans because:
- Tax Benefits: You can use these schedules to claim interest expenses as deductions against your business income, helping to manage your tax liabilities.
- Financial Planning: Amortization schedules help in planning and budgeting by showing how much interest and principal are paid each year.
Can I get amortization schedules for consumer loans?
While amortization schedules are more readily available for commercial loans, it is still possible to obtain them for consumer loans. However, it may not be as straightforward, and availability can vary depending on the lender.
Are there specific considerations when choosing between a business loan and a consumer loan?
Yes, consider the following:
- Documentation: Businesses may have different documentation requirements compared to individuals with regular payslips.
- Loan Terms: Business loans may offer different terms and conditions, including amortization schedules and tax benefits.
- Interest Rates: Business loans might have different interest rates and terms compared to consumer loans.
What is a Chattel Mortgage, and how does it work?
A Chattel Mortgage is a financing arrangement where:
- Ownership: The asset (such as a vehicle) is invoiced directly to the purchaser. The purchaser holds ownership of the asset from the outset.
- GST and Tax Benefits: The purchaser can claim back the GST paid on the asset, as well as the depreciation and interest costs.
- Claiming Payments: You cannot claim the loan payments themselves as a tax deduction.
How does a Lease differ from a Chattel Mortgage?
With a lease:
- Ownership: The asset is invoiced to the finance company, not the lessee.
- GST and Tax Benefits: The finance company claims the GST on the asset, and you can claim back the GST component of each lease payment. However, you cannot claim the GST on the asset itself or the depreciation and interest costs.
- Payments: Lease payments can be claimed as a tax deduction, but the GST and depreciation are handled differently compared to a Chattel Mortgage.
What are the advantages of choosing a Chattel Mortgage?
- GST Claim: You can claim back the GST on the purchase price of the asset.
- Depreciation and Interest: You can also claim depreciation and interest as tax deductions.
- Asset Ownership: You own the asset from the start, which may be beneficial for long-term use and equity.
What are the benefits of opting for a Lease?
- Lease Payments Deduction: Lease payments can be claimed as a business expense.
- Cash Flow: Leasing can help manage cash flow by spreading payments over the lease term.
- Flexibility: Leasing can offer more flexibility in terms of vehicle replacement or upgrades.
Should I seek professional advice before choosing between a Chattel Mortgage and a Lease?
Yes, it is crucial to consult with an accountant or tax advisor. They can provide tailored advice based on your specific financial situation, business needs, and the tax implications of each option.
Note: The information provided is for general understanding and not a substitute for professional tax advice. Always seek personalized advice from a qualified accountant to determine the best option for your circumstances.
Low Doc, PPSR Search, E-Sign
What are Low Doc Loans?
Low doc loans are designed for individuals or businesses with an ABN (Australian Business Number) who may not have traditional documentation to prove income. These loans are particularly useful for:
- ABN Holders: Especially those who have been established for over 12 months.
- Income Verification: They typically do not require detailed proof of income.
What are the benefits of a Low Doc Loan?
- Simplified Process: Less paperwork and documentation compared to traditional loans.
- Speed: Faster approval times, especially if the ABN has been established for over a year.
- Flexibility: Can be beneficial for businesses that might not have a full financial history but have a solid credit score.
How does the length of time an ABN has been established affect the loan?
- Established ABN: An ABN that has been registered for over 12 months generally results in lower interest rates and a smoother approval process.
- New ABN: A newly registered ABN might face higher rates or require additional documentation, such as bank statements or BAS (Business Activity Statements).
What additional factors can influence the approval and rate of a Low Doc Loan?
- Credit Score: A good credit score improves the chances of approval and can help secure a better rate.
- GST Registration: Having GST registration can be advantageous.
- Deposit: A deposit of at least 20% can lower the rate, especially if the applicant does not own property or land.
- Bank Statements/BAS: Providing bank statements or the last 2 BAS statements can sometimes result in better loan terms.
Can you provide an example of a successful Low Doc Loan application?
In 2010, I financed a concrete pump for Alex and Casey at West OZ Concrete Pumping. They needed a second pump but had a relatively new business. The lender required a deposit for security. Instead of using their cash, we negotiated to use their existing second pump as security. This arrangement allowed them to acquire the pump and support their business growth.
How can I get started with a Low Doc Loan?
- Contact Me: I’m happy to discuss your specific situation over the phone and provide honest, direct answers.
- Prepare Documentation: Even though less documentation is needed, having bank statements or BAS statements ready can help in negotiating better deals.
What is a PPSR search, and how do I use it?
A PPSR (Personal Property Securities Register) search checks for any financial encumbrances on a vehicle and whether it has been previously recorded as damaged.
- How to Conduct a PPSR Search:
- Visit the PPSR government website and search using the car’s VIN (Vehicle Identification Number).
- The search costs $2 and typically takes about 2 minutes.
- For a free report, you can use services like Budget Direct which offers complimentary PPSR searches.
- How to Conduct a PPSR Search:
What information will the PPSR report provide?
- Damage Record: Indicates if the car has been previously damaged beyond repair according to insurance assessments.
- Finance Encumbrances: Shows if there is any outstanding finance on the vehicle.
What should I do if the report shows finance owing on the car?
- Payout Letter: Obtain a payout letter from the current lender, indicating the amount needed to clear the outstanding loan.
- Settlement Process: At settlement, the lender will pay off the existing finance and transfer the remaining amount to the seller. For instance, if the car’s agreed price is $30,000 and there is $15,000 finance owing, the finance company receives $15,000 and the seller gets $15,000.
What if the car is recorded on the damaged register?
- Impact on Financing: A damaged record can limit your financing options. Lenders may be hesitant or offer less favorable terms.
- Price Consideration: Cars on the damaged register might be priced lower but could depreciate more quickly. They may be worth up to 30% less when you decide to sell them.
- Verification: Ask for pictures of the car before the damage and consider how this might impact resale value.
Are there other services for a more detailed car history report?
Yes, for a more comprehensive history, you can use services like Carify. They provide detailed reports including historical mileage and charge around $10 for their service.
Q: Are there additional considerations for buying a damaged car?
A:
- Flood-Damaged Cars: Typically not allowed back on the road due to potential electrical and safety issues.
- Scrap Value: Cars recorded as damaged beyond repair are generally only suitable for scrap.
E-Sign
- Most of our lenders now offer e-signed documents, which most customers prefer. Some lenders are only e-sign, so if you don’t want this as an option or only want this as an option, let us know upfront.
The only issue I have seen regarding e-signing is when clients don’t get a signal on their phone because they are remote, and the SMS Verification code will not come through. Generally speaking, this is the quickest way for everyone involved. Not all lenders offer this, especially business-style loans. If this is important, please let us know upfront, and then we can look at more options.
Do You Have a Unique Scenario in Mind?
Feel free to reach out to discuss any situation you have.
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