Charles Sturt - 5th Year Students Overview of Financing

1. Charles Sturt - 5th Year Students Overview of Financing

2. Possible Career Directions • Employee in an existing private practice • Associate- Sole trader operating out of a private practice • Partner- Shareholder in a practice • Owner- Sole owner of a Vet practice

3. Employee in Existing Practice

4. Partner – Shareholder in a Practice

5. Owner

6. What You Will Borrow Money For • Car • Working Capital • Property • Equipment • Practice Purchase • Construction • Fitout

7. Impediments to Lending The Purchase The Seller The Buyer The Consultant The Decision Maker RULES

8. Structure of a Loan • Principle • Interest • Term • Residual/Balloon

9. Structure of a Loan Only $30,000! $30,000 2 Years 0% Residual 8% Interest $1,347.83 per month Doc Fees $295 $30,000 4 Years 20% Residual ($6,000) 8% Interest $621.77 per month Doc Fees $295

10. But Wait, there’s more….. “$81 a week! – I can afford that.” Weekly payments based on 60m CHP, 10% deposit, 20% residual, 12.5%, plus establishment fee paid separately

11. But Wait, there’s more….. Deposit = $1,899.00 Residual = $3,418.20 Total of payments = $21,060 You Pay $26,377.20 Interest = $7,387.20

12. Types of Finance • Asset Finance • Car • Equipment • Fitout • Property Finance • Commercial Purchase • Residential Owner Occupied • Residential Investment • Commercial Investment • Commercial Construction • Residential Construction • Unsecured • Goodwill • Line of Credit • Term Loan • Credit Card • Overdraft

13. Security What you give to the financier in return for money

14. Security

15. Rate For Risk 0% 15% 20% 25% 5% 10% Property Loc Int Free Credit Card Cars B Cars Priv Equip Personal Loan F&F Goodwill

16. Property Loans • Loan/Valuation Ratio • Limitations 60%/70%/80%/90% • Lenders Mortgage Insurance • You pay. Around 3% of the loan value • Fees • The more complex the transaction, the higher the fees • Complications – SMSF • Interest-only, or principle & interest • Personal circumstances, not affordability. Financier will want to see serviceability • Commercial more than residential • Go figure • Redraws

17. Property Loans • Auction - From $250,000 • Loan Approval for $280,000, got $70,000 • Hammer falls at $350,000. • Valuation comes in at $325,000 • 80% LVR is $260,000; deposit required now $90,000 • Your LVR is 86%. LMI is $8,400; $18,130 including interest

18. Property As Security • Second Mortgage Not Favoured • Will only finance maximum of 80% of value • Cannot sell or change usage of the property without permission • If securing a business, you may lose the property if the business fails

19. Asset Finance • Lease • Financier owns the asset. You lease (rent) the asset. You may purchase the asset at the end of the term. Finance is pre-GST. Rental includes GST. GST is claimable by business. Rental is claimable as a tax deduction by business. • Hire Purchase • Financier owns the asset. You progressively buy the asset. Business use depreciation is claimable by the business. Business use interest is claimable by the business. Balloon is payable at the end of the term. No GST on payments • Chattel Mortgage • You own the asset. Financier takes a charge (mortgage) over the asset (or business). Business use depreciation is claimable by the business. Business use interest is claimable by the business. Balloon is payable at the end of the term. No GST on payments

20. Asset Finance • Fixed Term • Cannot be changed • Fixed Interest • Cannot change over the term • Asset Secures Itself • Usually no further security required • Residual/Balloon • Reduces principle payments. Due at end of term. Can be refinanced • Terms up to 7 years • 3 to 5 is usual

21. Line of Credit • Draw up to Maximum Amount • Interest only paid by regular payment • Fast Money • High Interest • No security • No fixed term

22. Goodwill • Secured or unsecured • May secure to unencumbered property • May need to be valued or benchmarked • Higher interest • Take care when securing property • Terms up to 10 years • Interest only or principle & interest

23. Construction & Fitout • Fixed price contract • Cost overruns • Progressive drawdown • Potential for multiple valuations • Administrative complexity

24. Practice Purchase • Goodwill Loan • Asset coverage? • Value? • Cashflow Projections? • Financials? • Contract of Sale? • Insurance? • Lease?

25. Practice Purchase • Equipment Loan – Lease? • Schedule of Assets? • Book Value? • Owned? • Age/suitability? • On-costs/maintenance?

26. Practice Purchase • Goodwill loan - $200,000 • Equipment Loan - $50,000 • Line of Credit - $30,000

27. Practice Purchase

28. Servicability • Establishing the capability to pay a loan • Net profit • Salary • Add-backs • Current Commitments • New Loan • Surplus

29. Serviceability • Interest expense • Depreciation • Salary • Superannuation • Donations • Leasing/Hire Purchase costs

30. Serviceability

31. Serviceability

32. Exercise 1 • The new loan will be $3,500 per month in repayments • Existing business loans are $57,921 per year • Home loan is $50,000 per year

33. Living expenses = $250 per week • Car loan = $81 per week • Car on-costs = $100 per week • Lunches/mags/going out = $220 per week • Balance $41 per week • Credit Card Interest = $29 per week Debt free in 8 years!