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Charles Sturt - 5th Year Students Overview of Financing. 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. Employee in Existing Practice. - PowerPoint PPT Presentation
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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
Employee in Existing Practice
Benefits Drawbacks
No overheads Restricted earning potential
Limited responsibilities Restricted Growth
Learn how a practice works, without risk
Limited choice of work
Partner – Shareholder in a Practice
Benefits Drawbacks
Ownership of goodwill – Appreciating Asset
Staff & Management Responsibility
Income Growth Potential
Debt From Buy-In
Existing Client Base Partner(s)
Owner
Benefits Drawbacks
Ownership of goodwill – Appreciating Asset
Staff & Management Responsibility
High Income Growth Potential
Debt From Buy-In, or start-up
Control of Business Decisions
Partner(s)
What You Will Borrow Money For
•Car•Working Capital•Property•Equipment•Practice Purchase•Construction•Fitout
Structure of a Loan
Only $30,000!
$30,000
4 Years
20% Residual ($6,000)
8% Interest
$621.77 per month
Doc Fees $295
$30,000
2 Years
0% Residual
8% Interest
$1,347.83 per month
Doc Fees $295
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
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
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
Rate For Risk
0% 5% 10% 15% 20% 25%
Property Loc
Cars B
Equip
F&F
Goodwill
Personal Loan
Int Free
Cars Priv
Credit Card
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
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
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
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
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
Line of Credit
• Draw up to Maximum Amount• Interest only paid by regular
payment• Fast Money• High Interest• No security• No fixed term
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
Construction & Fitout
•Fixed price contract•Cost overruns•Progressive drawdown•Potential for multiple valuations•Administrative complexity
Practice Purchase
• Goodwill Loan• Asset coverage?• Value?• Cashflow Projections?• Financials?• Contract of Sale?• Insurance?• Lease?
Practice Purchase
• Equipment Loan – Lease?• Schedule of Assets?• Book Value?• Owned?• Age/suitability?• On-costs/maintenance?
Practice Purchase
Loan Amount
Term Interest Residual Payment
GW $200,000
84 months 11.5% $0 $3,444.28
Equipment $50,000
60 months 9% $2,500 $997.29
Line of Credit $30,000
Ongoing 10.4% $30,000 $257.77
$4,699.34
Servicability
• Establishing the capability to pay a loan• Net profit• Salary• Add-backs• Current Commitments• New Loan• Surplus
Serviceability
• Interest expense• Depreciation• Salary• Superannuation• Donations• Leasing/Hire Purchase costs
Serviceability Serviceability: Projections TRADING RESULTS ($000's omitted) 30/06/04 30/06/05 30/06/06 30/06/08 This Loan
Gross Fees 0 0 0 200 200Net Profit Before Tax (NPBT) 0 0 0 138 138Directors Salaries/ Fees 0 0 0 0 0Directors Superannuation 0 0 0 2 2Depreciation 0 0 0 13 13Lease / CHP 0 0 0 0 0Interest Expense 0 0 0 6 6Other 0 0 0 0 0E.B.D.I.T. 0 0 0 159 159
Annual commitmentsThis Loan 0 0 0 0 12Current Medfin Lease/CHP(use exposure sheet to calc) 0 0 0 22 22Other Lease/CHP 0 0 0 0 0Existing Interest 0 0 0 0 0AVAILABLE INCOME FOR DISTRIBUTION 0 0 0 137 125Current home loan as per A&L ( calc at 9% over 25yrs) 0 0 0 26 26other personal commitments 0 0 0 0 0 Surplus(after all loans paid) 0 0 0 111 99
Net Profit Margin #DIV/0! #DIV/0! #DIV/0! 69% 69%Coverage Times #DIV/0! #DIV/0! #DIV/0! 7.2273 4.67647Interest coverage #DIV/0! #DIV/0! #DIV/0! 26.50 26.50
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
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