Credit & Funding Solutions
Specialist Advice Solutions

Tristan Bowman, Director

Credit is a vital component to how our economy operates, from government borrowing, business large and small, and households. Following many years of ultra-low and artificially suppressed interest rates, the cost of credit has gone up, and with it the conditions by which lenders approach the giving of that credit have tightened. The landscape for borrowers is therefore more vexed. The need for careful planning and navigation is essential.
Posted 15 May 2023

The lending ‘players’ have significantly altered over the last 10 years with a more prominent role of non-bank lenders, as banks have shied away and shrunk their lending ‘appetite’ outside of house mortgages. This has allowed a wide range of non-bank alternatives to become more prominent, and some have become lending experts in certain risks (property development, agriculture, securitised funding and home loans). 

Whilst conditions have become tighter, economic activity across business, property and households does not just stop. In some areas, funding competition is strong, especially for existing customers with known risk to the institution. What this highlights is the need to undertake careful planning to optimise scenarios, variables and assumptions to arrive at a range of outcomes. Through this article we discuss and explore a few of the considerations we take into account when assisting our clients with projects, current lending structure and specific financing needs.   

Cameron Harrison, through its Specialist Advice Solutions is able to assist its clients with Project Planning Financing & Management and specific Credit & Funding Solutions.

Intergenerational Help 

As parents and controllers of significant wealth, the pursuit of owning your principal residence and other lifestyle assets outright at a certain age (typically at 60 years) is a fundamental piece of the financial security puzzle.  In more recent times, parents/wealth controllers have ascribed this objective to their adult children.  This means providing significant financial assistance now to their adult children so that they begin property ownership on preferential terms, which in turn eases their financing burden and other family commitments over the next 10, 20 or 30+ years’ time. Estimates show that 1 in 5 parents are offering their children interest-free loans to help purchase a property.  

But there are do’s and don’ts when it comes to helping children or others with financing a property purchase. Some of the considerations are: 

  1. Lend, don’t give providing capital by way of a loan rather than a gift can protect the capital against marital and commercial risks.  

  2. Have an agreement in place – if a loan is in place, make sure there is an agreement in place that sets out the rights and obligations of each party. Consider the charging of interest or not, deferral of interest, the charging of interest rights of the lender and security terms. 

  3. Register the loan – where a loan agreement is in place, this can be registered as a second-ranking mortgage behind bank financing, providing further security for the lender.  

  4. Understand the risks of becoming a guarantor – in some respects, this can be riskier than providing a loan upfront and may impact future borrowing. Seek advice.  

Cash Flow is King – the role of restructuring and refinancing 

In a rising rate environment, it can be a hugely useful exercise to look at loan structure, be it residential or commercial, investor or owner occupier. Restructuring or refinancing loans can ease the cash flow burden of higher rates.  

  1. Debt interest costs are deductible when borrowed funds are used to produce assessable income or in carrying on a business for that purpose – to assess the structure of debt across lifestyle and investment assets, and also business – ensuring that where possible, debt interest is deductible. 

  2. Interest-only loans can reduce overall payments – there are downsides to interest only loans, but where there are short-term squeezes on cash flow, they can help provide some cash flow relief. Interest rates will typically be marginally higher but as there is no principal repayment, overall payments are usually lower.  

  3. Period or term of loanto consider varying the length of the loan, particularly if variable rate funding. This will assist cash flow and allow higher repayments in the future.  

  4. Bridging finance – a ‘break in case of emergency’ tool that can help manage lumpy cash outflows before a subsequent property or asset is sold. Bridging loans can be difficult to obtain and will likely only be available where there is ongoing debt after the bridging loan is repaid.  

The use of debt is often an important lever in a client’s wealth strategy over the medium to long term.  This can vary from utilising gearing to achieve broad inflation hedging, to project financing a development, funding a venture, or financing lifestyle assets for family members.  Where the wealth is significant, across multiple asset classes, across multiple entities, and the assets have wide risk differences, then much care needs to be taken in properly procuring debt and structuring the various components. The considerations cover: 

  • Entity management for correct tax outcome 

  • Asset protection; protection for commercial and family law risks 

  • Intergenerational wealth transfer planning considerations 

  • Cash flow profiling and liquidity management 

  • Finance structures, assumptions and scenario modelling  

  • Funding parties 

When there is complexity in wealth affairs, undertaking (project) planning and due diligence and objectively working through the issues and factors will create a robust proposition and underpin an effective project and financing decision. Cameron Harrison is able to provide the objective process and ‘fresh eyes’.  

We know banks are inconsistent in lending to small and medium business. One day the appetite is there, the next day it isn’t. Many lenders will seek to collateralise the business debt against not only the business assets but also any residential property owned by the business owner. This heightens risk, ideally non-business assets will be quarantined and protected from any business risk.  

There are a couple of alternatives to this.  

  1. Trade finance – borrowing against future sales can help provide cash flow relief. Funds are borrowed for the purchase of stock and then repaid on the sale. To be mindful of the requirement of director’s guarantees on the loans and tie-in of other entities.  

  2. Self-funded finance – depending on the size and the term of the loan, it may be preferable to use other superannuation or trust capital to fund the business in the short-term. There are several caveats to this, but if appropriate it can be the simplest and most cost-effective solution. 

  3. Security arrangements banks want it all, especially lifestyle assets such as principal residence and other properties. Managing security arrangements and the provision of specific and general undertakings is important.      

Funding and executing property developments is a complicated venture and requires substantial time investment to get the structure and agreements right before any ground is broken.  

Development finance is often underpinned by tripartite agreements between the developer, builder and financier (together with other important supporting agreements). They are the cornerstone of the project and will outline the rights and obligations of each stakeholder at various stages of the build. Regardless of the size of the development, there are several crucial elements to get right. 

  1. Robust financial modelling and stress testing this underpins your assessment and decision, but also underpins your lending team’s ability to assist you.  Your due diligence should countenance stress testing the various elements, participants and supporting agreements. 

  2. Make sure you have a quality builder and supporting consultants – agreements are only worth the people that stand behind them. Do your reference checks to ensure the quality and creditworthiness of the builder and consultants. Engaging the cheapest can quite often result in a false economy down the track with delays, financial issues, builder defaults, legal fees and litigation, and so on.  

  3. Communication – build in a minimum level of communication from each party throughout the project to make sure any issues can be dealt with swiftly. If utilising a financing adviser, then have them at regular project party meetings; we work with excellent financing advisers who have deep experience and relationships with lenders, and when issues arise as often they do, they are able to proactively manage the lender. 

  4. Documentationquality of documentation is vital, as the regulatory environment is complex and subject to disputation and litigation.  It is important to remember that there are other agreements with architects, development and project managers which also need careful examination. Ensuring the right legal advice is paramount. 

  5. Funding partner(s) your secured financier and parties such as funding brokers are important, especially when things do not quite go to plan (which is common).  As part of the funding decision, consideration of adverse events and who you are dealing with is important. 

  6. Parties avoiding liability just as you seek to mitigate liability in a project, one has to bear in mind, so too are the other parties you are contracting with.  Understanding your commercial agreements and the wide spectrum of downside risks will allow you to mitigate and manage at the contracting stage and then on an ongoing basis.  

Getting the right people 

Advice is key to all of this. The right lawyer, the right financing advisers/broker and the right project adviser. With many moving parts and significant development and liquidity risks, spending the time and resources to sort out the structure in the beginning can save enormous headaches in the future.  

In any financing exercise, forward planning is an essential step to ensure the most appropriate, secure and cost effective outcomes are achieved. At Cameron Harrison, we place significant emphasis on planning for success and helping our clients achieve success and security in their finances by engaging with approved financiers and lending advisers and brokers, to work towards sourcing the best possible finance and lending solution. It is this expertise that delivers optimal solutions.  

Speak to one of our advisers to learn more:

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