Do you have a small business but the bank won’t touch you?Tom Uhlich
Business owners can become frustrated when their bank declines their loan request. Quite often they come to Boss Money and ask, “How can that be? I have a successful and profitable business that can afford the repayments. Why won’t the bank support me?”
Part of the answer is usually explained by the decision of many business owners to legitimately take advantage of higher tax deductions to reduce the profit shown in the accounts and the resulting amount of tax paid. Whilst this may provide a preferred position with respect to the payment of company taxes it will ultimately also reduce the borrowing capacity of the business.
So simply, the bank is trying to access, ‘Is this business and are the business owners a worthwhile risk’. Most times this will simply come down to the profit shown in the accounts. How much money is left at the end of the day to cover a new debt? In saying that, the right mortgage broker will be able to understand your business financials and determine expenses that can be ‘added’ back to the bottom line to increase profit (and in turn the size of loan a bank will lend to you). Such items are Depreciation, additional Super, non-recurring expenses, interest. Also, some lenders will accept add-backs and some don’t.
In summary, while it is important to reduce the amount of tax you pay, these strategies need to be regularly assessed having regard to the medium to long term objectives and funding requirements. No point in reducing your net profit to a low amount that it stops you from borrowing for expansion.
Good planning of a business’s overall financial needs is best to maximise both their tax and borrowing capacity positions.
At Boss Money, we are also qualified accountants and have a good network of accountants and financial advisers to call upon.
If you would like a review of your business’s funding capabilities contact Boss Money today.
0476 111 000