Beware of the debt traps
There are enough challenges in business and farming without having to avoid debt traps. Most borrowers cannot believe that bankers would deliberately walk them into a debt trap so that they would be stuck there paying interest until the farm was sold or repossessed.
The big banks are so happy about their multi-billion dollar profits. They enable them to pay their executives multi-million dollar salaries. They want more of the same. It is just a game to them but it is no fun when the family business gets sold up by the bank. The family then spends sleepless nights worrying about what to do.
Once locked into an impossible loan it is hard to get debt relief. Hard, but not impossible! Greg Bloomfield learned early to negotiate hard with the bank.
Warning signs
There are warning signs.
- When the current loan (secured by home mortgage) is half repaid the bank calls. It starts telling you about all the things you could do by just borrowing a bit more. It looks so easy. Borrowing IS the easy bit. It’s the paying it back that is hard.
- The bank offers you a loan. The document tells you all about how many dollars you will receive in the loan. It tells you and nothing about how many dollars your will be paying. The latter is all a jumble of months and percentages.
- You are offered a long-term mortgage loan. It is interest-only for a good number of years, so it looks as though it is ultra-easy to repay. It will be a lot harder later.
- The bank suggests that it can help you with a generous “Succession Plan”. “It will give you more money than you have ever dreamed of.” What’s the catch?
- You have just repaid the 20 year farm mortgage. A bank rep tells you not to worry about picking up the title deeds or paperwork. “They will be safest in security of the bank.”
Let’s look at what can happen later on.
- The bank earns money by charging interest. As you become happier to see the bank debt falling, the bank gets more worried about its falling interest income. It therefore is desperate to encourage you to borrow more, knowing that it is well covered by the mortgage. Debt free farming or family business restores the good lifestyle. If you borrow more you increase the stress of having to work long hard hours. Why fund the bank profits and risk foreclosure if things go wrong?
- Borrowers often sign a mortgage document without batting an eyelid. They don’t study the details in any significant way. All they want to know is that they will be given money by the bank to do what they want to do. All borrowers should work through their loan documentation. Start with the Financial Consultant and then with their lawyer.
- Interest-only loans are a real trap. The repayments look so easy in the first year that it is common to look no further. Interest remains higher longer than it otherwise would. Down the track there is a very unpleasant surprise waiting. The actual loan itself has to be repaid along with the interest. If that happens at a bad time it can spell ongoing disaster.
- The worst possible succession plan is one that leaves the younger generation with a hunk of bank debt. It often takes a few years for their new ideas to produce a profit and in that time extra debt can be fatal. It is best to leave the operation unencumbered. We all know how hard it is to manage debt in bad times and watch it grow. There are superb succession plans that can easily and inexpensively be put into place. Such plans pass on the enterprise in the way that works well for both generations. It is better to talk to a professional about it before talking to the young ones. Once it is opened up in a family meeting, opportunities to think before speaking sometimes disappear.
- “No need to pick up the deed or papers” the banker says “we’ll keep them safe for you.” It is important to keep it safe, but! Along with the title deed or substitute, the bank also holds a mortgage. That is a ticking time bomb. The bank is not a safe place. The asset is vulnerable as long as the bank holds the mortgage over it. Make sure to get mortgage discharge document, even if it costs you.
First Greg Bloomfield consulted small business owners from a nationally affiliated Chartered Accountancy practice in Sydney. Then he simultaneously ran two hire companies. Next he ran sheep in the centre of NSW and Cattle in the Southern Tablelands. He chaired the largest branch in NSWF and founded a political empowerment service, Votergrams. He saw another need. So he switched to bank debt consultancy and toured the state. That worked so well that the demand from business owners and farmers throughout Australia just grew and grew. He moved from travelling to consulting online and by phone. Fortunately the political empowerment service enabled him to report dishonest bankers to Parliament.
Profitable Enterprises
The financial perils of family businesses are far greater than for larger business ventures. Changing fashions and regulations threaten consistency. Farmers and business owners can now use software to pinpoint important financial changes and model their finances under changing circumstances. Unfortunately most accountants are too busy to do that. Generally they use financial data primarily used to meet taxation liabilities and relax the bank.
Every family enterprise, whether business or farming should have a simplified financial control system to help them make more money. Greg constantly works with clients to focus on profit-making. If you are going to work hard all day it might just as well make money for you as well as for your suppliers. When the enterprise is more profitable the lifestyle is more enjoyable and the family is far happier.
The path to that happiness is to clear the debts like you clear weeds – ASAP.
