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What's best in the eye of the lender?

Discussion in 'Property Finance' started by Vacant, 16th Sep, 2015.

  1. Vacant

    Vacant Well-Known Member

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    Which is the best option as far as lenders are concerned? Employee, self employed, or company owner?

    I have been offered an opportunity and I'm unsure which way to jump. This is obviously just one of the factors but I would like to know how lenders view it.

    Basically, I have been offered the opportunity to merge my business with my parents and get a third share of their larger company. We both bring something to the table that the others would benefit from but I'm not sure what is best for me. How does it all compare in the eye of the lender?

    There are a number of different ways we can approach this, partner/contracter/employee/share farmer etc. but I would like to know which would be the best option from a lenders perspective? I couldn't get finance through AMP or The Greater previously because I worked for a family business. Is there any benefit being an employee? A few brokers I have spoken to suggested it makes things easier but if my income doesnt change what difference would it make?
     
  2. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    It sounds like its still going to be your business or in some capacity you will be director. As such you will need to show full tax returns. If you are an employee of company that is family owned - you will need to show salary credits going into your account or tax returns (depending on the lender).

    Don't worry if you are transferring a company to another company so long as you can show the bread crumbs being the income from one company and then the transfer to the new entity.
     
  3. Vacant

    Vacant Well-Known Member

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    Thanks Shahin.

    One option I'm interested in is to take up a full time managers role with my folks. That would probably mean a bigger and more secure pay but obviously as the business becomes worth more I won't benefit from that. Would this make getting finance easier as I'll have a steady income stream?

    It would mean putting my business on hold or at least putting it on the back burner a bit. I assume lenders would look at both sources of income, what about a stagnant business? Is that a bit of a black mark?

    Would I need to wait for a full financial year as an employee before being able to borrow or would regular salary credits suffice after a few months? Obviously being a family business income would need to be verified.

    The other option is share farming which would be a 50/50 split but again I miss out on any capital gains the business makes but I will benefit from any extra work I put in.
     
  4. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Working for family has it's own set of rules, certainly not as easy as a standard PAYG role, but not as difficult as Self employed.

    You can still be required to provide tax returns to verify income.

    Follow the path which makes you the most, long term that will help you far greater to build a portfolio than any short term benefits.
     
  5. Vacant

    Vacant Well-Known Member

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    What else would you need other than tax returns for self employed or family business? Is that the best proof of income?

    Just trying to get an idea of how to best present things. Won't be looking to buy for another year or so I'm guessing. My wife wants to renovate before committing money elsewhere.
     
  6. Vacant

    Vacant Well-Known Member

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    Also, how does income work with a company structure. If I'm a director and shareholder on a modest salary and any extra income is put back into growing the business will that be much of a setback? Do shares of a company count for anything if they are not producing income directly to me?
     
  7. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    Directors income, along with depreciation etc is added back into the figures. Total net profit figure is derived and used. What you pay yourself from company profits is irrelevant to the lenders.
     
  8. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Nothing verifies your income better than a couple of tax returns. If you paid tax on it, you probably earned at least that amount. :D

    The challenge I often see with self employed where there's more than one owner or stake holder is getting hold of company tax returns. Not all stake holders are comfortable giving over the business financials so one individual can get a loan.

    It's a fair point and fortunately there are ways around it, but it can restrict your options.
     
  9. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Being employed by a family company or being self employed doesn't prohibti you from borrowing, nor is any one structure better than the other.

    Some of my clients with highest debt servicing come from small family companies.

    The issue typically isn't the structure but the actual income

    The number of times that a client says my business makes 100 k. And then u get the rtns which show 60 k after normalish to low business's expenses is a lot. People talk ofceative accountants etc etc bug usually either

    The net profit of the business is indeed rubbish after real expenses

    Or

    There is an undeclared cash component

    Both can ofetn be fixed with time

    Part of the challenge is that many look to lower taxable income to unrealistic levels and then whine about not being able to borrow, you usually can't have both



    Ta

    Rolf
     
  10. Vacant

    Vacant Well-Known Member

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    Thanks guys, helps clarify things.

    If what you pay yourself from company profits is irrelevant, with three company owners, does the lender look at the total business income and divide it three ways?
     
  11. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    They certainly do this with a single owner, but with multiple owners they tend to look at how the money has been historically distributed. If it was marginal they'd probably take this into account and use it.

    If the full share of the company profit is needed it's very much a grey area. The bank would be looking at why the business needs to save money (it might be to replace depreciating equipment). Is there a healthy amount of operating capital in place?
     
  12. Vacant

    Vacant Well-Known Member

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    Not a great deal of operating capital at the moment, which is why I am cautious. Been a torrid few years with disease and storms but that's the reason the opportunity is there.

    Historically it has been very successful and we have taken steps to diversify so that should disaster strike we'll still be making plenty and if it doesn't we'll have a very pleasant problem on our hands.

    We've been working somewhat cooperatively for a while now and we're pleased with how is going, now we just need to figure out what the best option for both of us is.