Bank payment deferment periods do have some catches. Jeff Wilson senior partner equipment finance and Chris Burke, equipment finance specialist with Finlease explain what the catches could mean to your business.
At the start of the COVID 19, encouraged by the federal government, banks were quick to offer ‘holiday period’ for up to 6 months on home mortgages and commercial loan repayments. Some crane hire businesses that took advantage of the offer, are now faced with some unforeseen consequences which could impact the ability to fund future additions to their businesses.
“When we realised the impact the COVID pandemic was going to have, people saw in the media the banks were offering an up to ‘six month holiday period’ and the advice from the media and banks was effectively to jump on board,” said Wilson.
“This advice was for both home mortgages and also commercial loans.
Many businesses were very unsure of how well they would travel during the COVID shutdown and for many, a proposition to stop payments for six months and put the money in the bank seemed a cautious and understandably conservative, prudent response.
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“When customers rang us for advice, ours was not do this straight away, let’s first understand the devil in the detail, because the banks and the media were not telling the whole story,” said Wilson.
The detail the media and banks had omitted to reveal was the following:
1) The interest on the loan is compounding during that “holiday period”.
2) If a business is under a “holiday arrangement”, and has been for four or five months, sees that life and business is still OK, the construction sector is still going well and as a result wishes to acquire extra equipment for its fleet, their bank may take the view that as the client is “technically under a payment arrangement” they may be reluctant to provide further funding even though the client’s trading performance and cash flow looks sound.
To secure the finance, the client will inexorably have to jump through a lot of hoops and have to provide a serious amount of additional information such as bank statements, current ATO portals and current paperwork relating to the financial position of the business. The customer needs to prove to the bank the only reason they entered into the ‘holiday arrangement’ was due to concerns about cash flow including concerns about customers not paying,” said Wilson.
“We have seen many instances of clients simply stockpiling the funds usually paid in monthly finance payments into a side account and we can show evidence of this to demonstrate to the banks that the client could have made those payments throughout this time,” he said.
Even if the business can prove it has done this and it can use the stockpile of money to catch up with the payments, there’s no guarantee it will be able to get back to business as usual. The banks are looking at each case individually. It will come back to fundamentals like:
1) How long has the business been going?
2) Do they have equity in their machines?
3) What does the landscape “moving forward” really look like?
4) What have they done to ensure, in the event COVID continues, they have the financial resources to continue to weather the storm?
“Our initial advice was to sit tight for the short term and see how this is going to play out. We spoke to approximately 200 customers from various industries and I would say approximately 25 per cent of them went onto the ‘holiday arrangement’ some of which had to because of the industries they worked in (restaurants, hospitality etc). The other 150 customers decided to take their time to understand what the implications were going to be for their business,”said Wilson.
“Six to eight weeks after making this initial decision they called back and we discussed how their business was faring. We explained the implications of some of the bear traps that had been uncovered and, of the 150 customers, approximately 130 said they didn’t need to enter any arrangements and they would continue with business as usual and continue trading as they were,” he said.
According to Burke, the advice to wait and see paid dividends for the businesses that had the option.
“That advice was key and comes down to the experience Finlease has in someone like Jeff. At the time, I know bank managers were actively advising customers to take advantage of the ‘holiday arrangement’ if they thought they needed it,” said Burke.
“The advice from both Jeff and myself to our customers was to wait and ‘understand the finer details before making a decision’. Four to five months later, I think that advice has assisted clients in leaps and bounds because so many have subsequently turned around and said we need finance for a crane, truck or car. If we hadn’t taken the time to not jump in and understand how the pandemic affected their business, it would be a lot more difficult to assist them now,” he said.
It has also meant a number of companies have now been able to jump on the tax incentives that the Government has presented to stimulate and promote businesses, and the economy in general. Wilson provides an example of the Asset Write Off Scheme and what it means to a crane hire business.
“Let’s say a crane company turns over $10 million a year and they have a $750,000 profit every year. The tax on $750,000 in round figures is $205,000. This tax bill is paid in their PAYG every BAS quarter which equates to $51,250 on top of the BAS (GST) every quarter,” he said.
“As a result of the Government incentives, if that company bought a brand-new crane for $1.5 million, the immediate tax deduction would potentially be up to $855,000. This is where the ‘kickers’ come into the equation.
“Where the company were making a profit of $750,000, they now make a loss of $95,000. The Government then is refunding the $205,000 they’ve paid in their PAYG in pre-payments because you pay tax in advance. The next advantage to cash flow is because your financials would show a loss from the prior year you are not paying any PAYG for the year ahead, I call it ‘profit tax’ going forward. It’s injected the $205,000 into your cashflow saving you $51,250 per quarter.
“It has been easier to provide this type of advice and put together these sorts of packages for companies that weren’t under the ‘holiday arrangement’ plan compared to companies that were. We’ve spent a lot of time talking to a lot of our customers about this and every crane OEM has seen their enquiry rate go through the roof because of the Asset Write Off Scheme,” said Wilson.
Financing is always a good thermometer in terms of the market’s confidence. According to Wilson, there have been some serious orders for big cranes which will be delivered over the coming 18 months to 24 months, some headed for the renewable energy sector and infrastructure.
“There has been a lot of activity and we have assisted in the financing of a number of major contracts. At present there are some concerns, in New South Wales around the EBA negotiations and this isn’t helping confidence amongst crane owners. The COVID resurgence in Victoria will not help business confidence there but generally speaking I can see there is still a lot of confidence around the construction and cranes sectors, particularly when it comes to renewables, resources, construction and the national infrastructure structure program,” said Wilson.