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

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

Impediments to Lending

The Purchase

The Seller

The Buyer

The Consultant

The Decision Maker

RULES

Structure of a Loan

•Principle•Interest•Term•Residual/Balloon

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

Security

What you give to the financier in return for money

Security

0

10

2 0

3 0

4 0

5 0

6 0

7 0

8 0

9 0

10 0

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

• Goodwill loan - $200,000• Equipment Loan - $50,000• Line of Credit - $30,000

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 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

• 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!