Today’s media is full of comment about the possibility of bank lending coming to a grinding halt as the combination of the Royal commission, falling house prices, drought, floods and fires rocks the finance industry.
Borrowers wonder whether they will be able to obtain the finance they need for their businesses, farms or homes. The Treasury wonders whether the stability of our major banks will be threatened by the risky loans they have issued in the last decade or two.
Politicians promise counsellors to help borrowers sort out excessive loan problems.
Banks of course will not stop lending because that’s how they make their profits. Therefore borrowers need to fit within the bank parameters with good loan applications instead of engaging brokers to do the job for them. The commission reported on extensive problems with mortgage brokers.
What GBAC has been doing for decades is conferring with borrowers and working out how to help them borrow on the best possible basis. It must be obvious that if banks are paying mortgage brokers a commission for obtaining loan business, the mortgage brokers receiving the commission will be working for the bank rather than the borrower. The process seemed appealing to borrowers because they did not have to pay for it. The broker appeared to be looking after the borrower for free. However one normally gets what one pays for and that is particularly so when dealing with moneylenders, governments and businesses. It would be sheer fantasy to believe that the borrower was not paying for the broker’s commission within their loan repayments.
When the bank and its broker does all the work for a mortgage it is reasonable to expect that the loan will be heavily slanted towards the bank’s benefit. When the borrower employs a banking expert to help them obtain the right sort of loan with the best interest rates and charges and loan terms that are appropriate to the borrower it is reasonable to expect that the loan will suit both the borrower and the bank.
It is at this point that it pays for all of those on the borrower’s side of the table to do some careful homework and find out what risks exist for the borrower and how any unexpected surprises would be handled. This information should then be converted to a brief risk management schedule filed with the loan documents for easy access when problems arise. It is very rare for a loan to run its course without some problems arising so it pays to be well-prepared and deal with those problems as they arise. The very best policy that we have found over the years is for the borrower to contact their loan consultant and have the consultant contact the bank with solutions that will be acceptable to the bank. The biggest debt problems arise when borrowers failed to quickly remedy loan defaults by satisfactory discussions with the lender.
Then the question arises as to whether the borrower will be able to service the loan with interest and charges as required and repay the debt exactly as specified in the loan agreement. This requires detailed study of the loan agreement by the banking consultant and expert legal advice which is best provided to both the borrower and the banking consultant so one involved is working in the same direction. This is the point in borrowing that most problems arise though they may not manifest themselves until many years later. There will almost always be doubts in the mind of a borrower, banking consultant and lawyer as to how the loan is likely to play out for the borrower in the future when nobody knows what the future holds.
For the borrower that is in doubt about what to do, the best advice is to find out and that means discussing the problem with their loan consultant. The cost of that will be minuscule compared to the costs of a major rescue if penalty interest rates are applied, foreclosure is threatened or receivers and managers appointed.
I am always happy to have a free no-obligation chat with someone wondering whether we can help them or not.
On the surface this is an unpalatable solution for those who dream of accumulating assets, but often that dream turns into a nightmare, so it pays to think all options through if loan repayments become difficult. There are many other solutions, but sale of assets is one of the most liberating and effective.
Thousands of Australian have been lured into debt by low interest rates and easy credit. Most have done their calculations and convinced themselves that they can buy investment properties at cheap interest rates on “interest only “ loans, earn a small profit or a tax deductible loss from renting it out then sell it for a capital gain taxed at only 15% or 20%. It is just easy tax avoidance which our politicians generously offer.
Negative Gearing
But is it a gift to voters or to the moneylenders who bankroll the political parties? Given that the loss caused by the interest means that $1 must be lost to save tax of 37 cents ( if total taxable income is around $100,000), the investor is out of pocket by 63 cents in every dollar spent on interest or maintenance during the period of the loan. The capital gain is suspect because property values go up and down and contain an inflation factor which is no gain at all. If the capital gain is taxed at 15 % the person enjoys a net after-tax gain of 85% compared to the loss on interest paid of 63%. Thus they have achieved a gain of 22% (85 less 63) if the interest paid equals the capital gain. It is a sum that few bother to do.
However many loans have passed their initial “interest only “ period now and that can cause problems to those borrowers for whom the loan was never really affordable. I have always considered an “interest only” loan as being a “claytons loan”, that is to say, a loan for someone who cannot afford to borrow service and repay that amount. It looks so easy when one focuses on the interest. It is quite hard when you consider that the property may not be easy to convert back into cash, but the debt must be repaid in cash on time. Holding assets purchased with loans and bleeding cash is a common financial sickness faced by many borrowers the world over.
When to quit
The collapse in real estate prices that usually follows most booms exacerbates the financial crisis they face. For many it is seriously worthwhile considering the sale of all or some of the assets they hold on borrowed money. My philosophy on almost everything is that it is worth giving it a go, but then the things that do not work should be quit as soon as convenient. If the bank is issuing default notices, the property is costing more to hold than is covered by rent or the property market looks oversupplied (which often foretells a crash), the borrower might well do some sums to work out the plusses or minuses of selling property. In some cases property investors may be able to sell enough of their real estate at good enough prices to clear their debt and have some assets left debt-free. That is a great situation to be in. I know that “fortune favours the brave” but for each of those brave ones who make a fortune there are a good number who lose everything, so I see exiting debt as frequently being a good option.
The issue with holding investment properties on debt is that the holder is speculating on a capital gain at low tax rates. The real benefit from negative gearing frequently flows to the moneylenders, not the investors who rarely take into account inflation, discounted cash flow or the real tax benefits they receive. The banker makes a killing because lenders just earn the interest and often send their profits to a tax haven so they don’t pay tax on the gain at all. If they foreclose they can stage a forced sale and invite friends and associates to buy a good property cheap.
Good Debt
Debt can help individuals, businesses and farmers to acquire properties they could not otherwise acquire, so in that sense it is good. It can destroy them through the accumulation of unpaid interest on which penalty interest rates are charged and through changed financial or economic circumstances. Good debt is well thought out, to purchase long term assets with an affordable repayment plan drawn up before the documents are signed. Sensible borrowers will make significant changes to reduce their spending patterns in order to clear debt early. Debt seems benign, but a change in the economy, the law, demand or health can change the situation almost overnight. Like a surfer on a wave, it can work well if the balance is kept right, but go seriously wrong with the slightest miscalculation.
That is why I converted my Chartered Accountancy practice into a Bank Borrowing consultancy. I saw the destruction and heartbreak that followed bank de-regulation and set out to even the scales and give borrowers enough support to not be taken down by ruthless lenders. The Biblical proverb “A borrower becomes the lender’s slave” is just as accurate today as when it was written BUT well thought out and well managed, the bank can become the borrower’s slave instead.
For most Australians in business or farming the Banking Royal Commission will not make any significant difference. It is not so much a question of banks
Tailored loans
tightening their lending criteria, as them tailoring loans to the clients’ needs. It is of course much easier to let the computer do the work, putting people out of jobs to boost the boss’s pay packet, but it is not nearly as good for borrowers as having people manage their loans. Banks should tailor their loans to suit the clients’ ability to service and repay the debt. Attention needs to be given to long term past profitability, not the fantasy that some borrowers, brokers and bankers cook up, that is never likely to be achieved. Borrowers need to understand that the bank has the opposite objective to the borrower – to secure the banks position first and make the most out of the customer second. The borrower probably wants to pay the least interest and increase wealth or assets generally with the loan.
COMMON MISTAKES THAT BORROWERS MAKE
Most borrowers for whom we end up getting a bank to write off debt have done one of the following:
1. Received an interest-only loan because they could not afford to repay the loan and were unlikely to do so. The bank has therefore counted on earning interest for a while, imposing penalty rates of interest for a while, accumulating unpaid interest onto the loan then foreclosing and selling the borrowers’ property. One major bank indicated to me that that was exactly what they thought their customer had in mind. Had the bank explained that up front to the borrower, most borrowers would not have accepted the loan offered.
2. Suffered some external event like falling wool, beef or grain price, or a slump in the real property market like houses or industrial premises that prompted the bank to call in a substantial part of the loan at exactly the time when the borrower simply could not manage to do so.
3. Battled to repay in time the loan which was monitored by computer so that the computer would not recognise large payments in advance for a business dependent on several large revenue payments a year. A business might pay 5 months instalments in one go out of a payment from a customer, but when that borrower did not pay the next monthly payment due 30 days after doing so, it received default notices and threats of repossession from the bank computer.
4. Failed to cope well with some abnormal event that rendered regular payments impossible eg illness, death of an executive, flood, fire, or drought. Borrowers were often at fault too in these cases for not notifying the bank in the right way and early enough. The result was recovery action when sitting out the drought, illness or flood would have produced as good a result for the bank and a far better one for the borrower who lost everything. Communication from borrower to banker is key.
5. Borrowed from bankers who were simply ignorant about the way that borrower’s business or farm was run and how it produced profits. The bank therefore made totally unsuitable loans to them then expected the borrowers to deal with an impossible debt situation.
DISHONEST BANKS
Many banks were thoroughly dishonest, incompetent, negligent and deliberately led borrowers into situations from which they could not escape and which enabled those banks to enrich friends by selling foreclosed properties well under market prices at particular times. The Royal Commission will not stop that. For 20 years our clients have told all federal MPs by Votergram about what the banks were doing, yet to the last those politicians went kicking and screaming , dragged to set up a Royal Commission. Don’t hold your breath for any political party that accepts big bribes from banks to do much about the problems. Don’t be lulled into false sense of security by the fact that the bribes are called “political donations”. They are bribes designed to produce a particular result and the politicians know that perfectly well. They don’t come in brown paper bags because brown paper bags are not made big enough to hold these bribes!
PRACTICES THAT MAKE MONEY
So, what solutions are available to Aussie borrowers outside of the Royal Commission report? One is for every borrower to maintain contact with the most senior banker they know by phone or visit every month or two. Think of any excuse. Particularly make contact when there is good financial news to share. Borrowers should work hard to build good relationships with bankers. That is every bit as important as making good profits from which to service and repay the debt. In many cases it is only bank directors and perhaps senior executives who are crooks. Other bank staff are often as honest as the day is long. The person granting the loan generally knows nothing of the thugs used to collect it if it defaults. Remember the story about not putting all your eggs in one basket, more appropriate when we had shopping baskets and single eggs. Wise borrowers do not keep all of their bank transactions with the one bank. To not let your left hand know what your right hand is doing is a sound principle of banking. Bank with 2 or 3 banks so that you have somewhere to go if one starts to cheat or hassle you. Build up the best relationships possible at each. Then they will probably all be vying for your business. Banks only offer good rates if there is competition.
Take “over-limit” or demand notices seriously. Nothing gets a banker angrier than having to continually report to senior management that a customer is over the limit and just ignoring notices. When someone from my superb Bendigo Community Bank phones me to let me know that one of my or my clients’ accounts is overdrawn or over limit I immediately either fix the problem there and then or explain to them how it has arisen and come to some arrangement with them. A borrower who rings the bank to say they have inadvertently overdrawn their account or to ask if they may temporarily do so, wins lots of credibility. Always put yourself in the other person’s shoes. But beware! I have sat with clients and bankers when the client said they never exceeded their limit and the banker pointed to those times when going over limit was approved by the banker, as still being defaults. If you had loaned money to someone as a business transaction to earn money, you would always be delighted to hear from that borrower even if to work through some issue to a satisfactory conclusion. It would annoy you to discover a problem when it was too late to fix. It would annoy you more to have to keep chasing the borrower without any success.
NEVER “TRUST” THE PERSON WITH WHOM YOU DO BUSINESS – CHECK EVERY ASPECT YOURSELF
Amazingly bank customers cannot believe that their banker would deliberately lead them into a debt trap just to get a bonus or advancement or boost bank profits. Christ’s spat with the money changers in the temple and Shakespeare’s “Merchant of Venice” should provide a clue to those lucky enough to read of them.
Why do bankers rob, lie and cheat their customers? I think the answer is probably the same as to the question “Why to customers mislead and rob their banks by lying and cheating about their ability or intention to repay the money they borrow then not repaying the loan as agreed.” The person who gets a bank loan by telling the bank a pack of lies about their financial situation and ability to pay, makes a thorny rod for their own back. The bank can make super profits out of them. The best way to apply for a business or farm loan is together with a banking consultant with nothing to do with that bank. The banking consultant will ensure that the application is truthful and then tailor the loan and loan agreement to the borrower’s actual ability to repay the loan. Part of that consultant’s role is to help the borrower monitor the loan to ensure that if any term in the loan contract is breached, the borrower knows about it first and contacts the lender.
BANKING CONSULTANTS
The consultant’s job is also to examine the borrower’s profitability and if necessary help increase it so that the debt can be serviced and repaid on time. Often borrowers need someone to talk to about changes in business and failed plans. The banking consultant should be that person because they can quickly assess the likely impact on the loan and take remedial action. In a number of cases we have managed to move borrowers large and small from losses and overwhelming debt to profits and minimal debt. It is increased profit that makes it easy to manage debt. Minimising consulting fees is good for business, but not when the whole business and perhaps the owner’s home is lost for the sake of consulting fees. At GBAC our calculations show that, although we do not set out to do it, our clients generally make about 10 times as much as they pay from our fees. That is as it should be. I hate seeing the bank earn more money out of a business or farm than the business owner or farmer. Owners should be the bucket in which substantial profits reside, not the pipe through which their revenue flows straight out to others.
WHAT BORROWERS MOST NEGLECT
There are two faults we see most in borrowers:
1 They do not prepare or commission any sort of loan impact analysis to show them the long term impact of the loan. That is sheer lunacy! Most loans are long term and the impact needs to be known before pen is put to paper.
2. They do not read or understand the loan contract. This is an unbelievable sin. To sign an agreement without knowing what has been agreed to is madness. It mostly happens because the borrower believes that it only says, in “legalese”, that the bank has loaned the money and the borrower has to pay it back. A bank loan contract has been drawn up by the best legal brains in Australia to ensure that the contract is all one way in favour of the bank. Sometimes it has been reviewed by a borrower’s lawyer, but most lawyers know the law well but have no idea about the credibility of financial statements or the verification of budgets. Not so long ago I discovered in a little obscure clause in the middle of a loan agreement , a clause providing that the borrower would sell one of their properties before a certain date. As the borrowers had not the slightest intention of doing that, either the bank or the borrowers were being dishonest and given the behaviour that I had seen from this bank, it was probably the bank that was dishonest. The bank got the borrower to sign up the day he left hospital aftre a major operation.
POLITICS
Someone in the major political parties must have been bribed or those parties have no interest in family businesses and farms, to make the politicians fight so hard to hide the dishonest practices of banks and regulators of which they had been repeatedly told by Votergram to every federal MP over about 20 years. I don’t have political favourites, but if I were an individual, a small business person or farmer taken to the cleaners by my bank, wealth manager or insurance company, I would certainly be putting my sitting MP last on the ballot paper at this year’s election if I was in a safe seat, unless they have been outstanding MPs. It would just send a message to teach them a lesson that if they want to be our representatives in parliament then they need to perform a lot better than they have been doing.
Only votes hold politicians accountable.
Only marginal seats where a swing of less than about 6% of votes from the government to Labor in the final count, would elect a new MP, to determine who governs the country.
According to FairGO, voters in over 100 “safe” federal electorates do not have any impact on who wins government but they have total control over whether they send good, honest, capable people to parliament who will represent them (the voters) rather than just a political party, or not. You can find how safe or marginal your electorate is on Wikipedia’ 2019 electoral pendulum.
We tend to think of financial statements as something those pesky accountants want done in order to complete our tax returns. In reality they are vitally important in allowing us to monitor the financial impact of our everyday lives running our farms and avoiding debt issues .
Financial statements are only helpful if they are truthful. Don’t fool yourself just because you are fooling the Tax Office. The first requirement to ensure that your profit and loss statement is accurate is a Balance Sheet (or Statement of Assets and Liabilities) that balances. If there is no balance sheet the profit and loss may be completely wrong.
The other factor that can make your financial statements useful, particularly your Trading Account and Profit and Loss, is a comparison with last year’s figures and your budget for this year. Ideally financial statements should be run off monthly or quarterly to provide advanced warning of problems. In farming it is rarely possible to control income, so it is very important to keep expenditure to a minimum and save a sustantial part of each year’s profit to build up cash reserves.
Knowing how much you are making or losing should be top priority, particularly if you are carrying a loan or overdraft. The sooner you clear those the better, because when tough times come, they will make life much harder for you.
Don’t think of financial statements being just for the Tax Office. Use them to boost profits.
Unaffordable debt is a prime cause of business failure, like the “Phoenix” solution talked about in recent media – “Phoenix scams about to go down in flames”. Crooks may find that winding up one business and starting another works for them, but honest business owners can do a far better job that improves their credit standing and position in the community. Because business owners, particularly those with small to medium sized businesses, are often so busy running the business, they may not control debt properly at the same time.
1. Take the demand notice seriously. Many borrowers put it aside as an idiotic piece of paper that fantasizes about a huge amount of debt. It should be dealt with immediately.
2. Call on the very best bank borrowing consultant you can, because you may be certain that the bank has already employed the very best of lawyers and the sort of debt collectors who figuratively wield baseball bats with a mean hand, to collect every cent you owe.
3. Get out your loan documents and letters and read them carefully with your bank consultant. You will see, perhaps to your surprise, that you have pledged to deliver your children’s hearts on a plate to the bankers if you don’t pay up. If not their hearts certainly their happiness in terms of their home and security.
4. Look inquiringly into what has caused the problem. Over-spending? Over-expansion? Losses? The economy gone bad? Government policy? Cash-flow crisis? Drought or flooding rain? What has caused this situation? Only by finding out can it be readily rectified. Was it purchasing too much property or a sudden rise in interest rates?
5. Look for refinance. That means approaching every other bank lender to see which of them will refinance the loan. It is important to act on this with your banking consultant as soon as demand notices arrive. But don’t apply until the business has been worked over for improvement.
6. It is far better to have looked for re-finance as soon as the loan facility became difficult to manage or payments became overdue. The earlier you decide to seek re-finance the easier it will be to obtain, if you have a half-competent consultant.
7. Prepare a very attractive and appealing bank loan application. Your consultant can do this. It needs 5 or 6 good photos to put new banks in the picture on what you do. Use accurate “management” accounts and only put your tax return at the back. The tax act allows a lot of items to be written off that are not really expenses, including owners’ salaries and capital improvements. Your consultant will reconcile the tax return with management accounts.
8. Take severe cost-cutting measures and work hard to increase income in order to increase profits. Reduce capital equipment and stock on hand to provide extra cash. Don’t take little steps in this exercise. Be ruthless! Remove the dead wood and overcome lack of return.
9. Force the business to earn profits you can draw out. Put them into a special “savings” account to make major debt reductions later. Paying off small amounts as you go does not usually work because the bank will often let you draw them out again.
10. Sell non-essential assets to clear debt. It is surprising how much money can be generated by the serious identification of surplus assets that just lie around and the conversion of them into cash.
Sydney Morning Herald reported today that the government received or would receive $17 million in fines from financial advice business Financial Circle for the damage it caused its clients by operating as it did. It is worth reading the article
What about all those poor people who were just looking for simple debt solutions. They knew little about finance, just wanted loans and according to the Herald were relieved on their money instead of having their loan problems solved.
Why do we see the Government $17m richer for apparently letting a business behave dishonestly, while the people who were taken down get nothing?
We saw this with the government that allowed banks and insurance companies to rob their customers blind for well over a decade, then collecting a reward of millions of dollars in fines from those banks and insurers.
GBAC has worked for over 40 years with many businesses and farmers to ensure that they can get sensible, fair assistance.
Would you support laws that instead provide mandatory compensation (not just refunds for amounts fraudulently taken) payable by offenders to those who lost their money. Email greg@gbac.com.au with your views.
Credit ratings can cause bank abuse and be incorrect as the GFC revealed. We might ask “why is Equifax which was reportedly fined $3.5m for deceptive and unconscionable conduct allowed to continue trading after charging consumers illegally for their own credit record?”. Advocates like FairGO can help consumers who are over charged by the financial services industry. It is not necessarily easy or fast, but it can be done just like with stock and crops – by doing what is necessary to achieve it.
Surely the federal and state governments should not be making small fortunes in fines by allowing dishonest behaviour in the finance industry as it has for years. Instead it should be cancelling the licences to operate so that the dishonest operators are removed from the industry. The fines are chicken feed compared to the profits they are dishonestly making out of consumers. Borrowers ultimately pay people like Equifax, because the credit agencies charge lenders and the lenders include those costs in the charge to borrowers.
Given the dishonest behaviour by governments and the finance industry, the best thing borrowers can do is reduce their reliance on debt. Debt mortgages their future, that few can know in advance.
Borrowers being hassled by banks can obtain assistance from financial counsellors who receive funding from the government and at least one bank or from one of the many independent loan consultants. GBAC reckons that borrowers earn in interest saved or in discounts on debt about 10 times what they invest in having GBAC take on the bank for them. That is a 1,000% return on investment. It is hard to get that from farming.
Surely the federal and state governments should not be making small fortunes in fines by allowing dishonest behaviour in the finance industry as it has for years. Instead it should be cancelling the licences to operate so that the dishonest operators are removed from the industry. The fines are chicken feed compared to the profits they are dishonestly making out of consumers. Borrowers ultimately pay people like Equifax, because the credit agencies charge lenders and the lenders include those costs in the charge to borrowers.
Given the dishonest behaviour by governments and the finance industry, the best thing borrowers can do is reduce their reliance on debt which mortgages their future, that few can know in advance.
Borrowers being hassled by banks can obtain assistance from financial counsellors who receive funding from the government and at least one bank or from one of the many independent loan consultants like GBAC that reckons borrowers may earn in debt write downs about 10 times what they invest in having GBAC take on the bank for them. That is a 1,000% return on investment. It is hard to get that from farming.
It’s not just better rates that you get from bargaining. It can produce big debt write offs. For many borrowers in family businesses or farms carrying big debt, the bank makes more out of the business than the owners. That is because the bank puts a lot of time and effort into making money out of its customers. Every business does that, but moneylenders do it better than most because they pay attention to every cent.
If you make the effort to manage your finances well, you will make the money too. It makes sense to live your life in a way that will make you at least moderately wealthy.
The BankBid service enables you to extract good interest rates from your bank and other banks. It is always prudent to bank with a number of banks. Then you can choose the best one for whatever you are doing, after playing one off against the other. This system for a modest fixed fee was started in 1987 as Moneygrams by a Chartered Accountant who specialised in debt issues after banks were deregulated. It has saved many bank customers a lot of money over the years.
Preparing good loan applications is another thing that consultancy does today. The royal commission has revealed that the standard “Tick the box” applications are not sufficient for the individual circumstances of each borrower to be properly assessed. For that reason borrowers can also retain a low cost debt consultant to coach them in managing their debt for the highest profit.
Once debt gets out of hand there are numerous good solutions. One of the best is to negotiate a settlement with the bank. There are many factors in negotiating these agreements but the most important one is to have bargaining chips up your sleeve. That is one reason why a good debt consultant with accounting qualifications and business/farming experience pays off.
may find that winding up one business and starting another works for them, but honest business owners can do a far better job that improves their credit standing and position in the community. Because business owners, particularly those with small to medium sized businesses, are often so busy running the business, they may not control debt properly at the same time. 
rain? What has caused this situation? Only by finding out can it be readily rectified. Was it purchasing too much property or a sudden rise in interest rates?
increase income in order to increase profits. Reduce capital equipment and stock on hand to provide extra cash. Don’t take little steps in this exercise. Be ruthless! Remove the dead wood and overcome lack of return.
reductions later. Paying off small amounts as you go does not usually work because the bank will often let you draw them out again.
Credit ratings can cause bank abuse and be incorrect as the 