The world, especially the SME sector, has been shaken likenever before.
Cash has always been king for all SMEs, and cash flow has never been more important than in the current environment. This is when a trusted broker and lender are worth their weight in gold.
One of the key priorities for brokers should be working with their SME clients to explore ways to preserve and improve cash flow. These should be carefully considered in order to address the individual circumstances of each client, such as restructuring debts from aggressively amortising loans to longer-term facilities; converting facilities from principal and interest arrangements to interest-only monthly payments; consolidating facilities to reduce monthly repayments; and releasing equity for capital purchases. Every option between these and others should be on the table.
At Thinktank we can help brokers and borrowers work through their options. Our commercial property loan terms are geared towards helping borrowers maximise their cash flow and equity, and we work hand in hand with our brokers to produce flexible and workable solutions for SMEs.
A number of other issues and opportunities are emerging, with one consideration being greater credit scrutiny.
A key feature of the COVID-19 environment is the increase in ‘real-time’ credit assessment. Traditionally, lenders have looked at historical income from secured property as one of the main criteria when doing serviceability calculations. But in today’s unsettled climate this may no longer provide a clear picture, especially where business revenue may have decreased and/or increased, depending upon the industry or sector the SME borrower is active in.
Producing additional supporting financial information may now be required in the form of debtor/creditor ledgers, ATO portals and bank account statements to substantiate the current trading performance and cash position of a business moving forward. Financial statements might show healthy amounts owing in accounts receivable, but how many debtors are paying on time or perhaps even paying at all?
We work hand in hand with our brokers to produce flexible and workable solutions for SMEs
Again, having trusted advisers, such as a broker, lender and accountant, will be critical for SMEs to work their way through all of these more stringent conditions.
With the dramatic changes in the economy, available funds have been diminished for a host of purposes, including the purchase of commercial property. This has near- and medium-term implications for property values.
Commercial property rentals have also been impacted due to many leases being renegotiated and vacancy rates increasing as businesses close their doors. This may result in parts of the commercial property sector turning from a lessor to a lessee market, in which the tenant has more power to drive the end rent of a property.
As we know, out of a crisis always comes opportunity. Those SMEs with borrowing capacity will be well placed to take advantage of any short-term pressure on commercial property values.
What are some of the other opportunities that SMEs can look towards with a positive lens?
The way we work during isolation has presented tremendous challenges but also opened up new ways of operating. This could have a significant impact on organisational and property decisions moving forward.
Does working remotely work, and will embedding a more flexible structure be better for the business? Can we downsize? Or for a business that requires their team to be under the one roof, do we need larger premises to maintain safe distancing?
Yes, all these questions present their own challenges. But they could also pave the way for a more productive, safer and happier workforce.
If an SME has the means, there may well be the opportunity to acquire freehold assets at fair market, or even temporarily reduced values, for investment or to house their own business.
Out of a crisis always comes opportunity; those SMEs with borrowing capacity will be well placed to take advantage of any short-term pressure on commercial property values
It could also be the perfect time to look at refinancing to open up cash flow and funds for investing, particularly within an SMSF. At Thinktank, we know how difficult it is to navigate through tough economic times, especially for SMEs. Our own business was formed shortly before the GFC hit in 2007.
Peter Vala, general manager partnerships and distribution, Thinktank
It’s why we have structured our commercial property finance solutions to provide the greatest flexibility and choice for borrowers – a factor that is particularly important right now.
Our view has always been to allow borrowers to seek funding over the longest term possible. This allows repayments to remain as low as they can be, and if circumstances change it provides the ability to pay off a loan quicker if the borrower desires to do so.
We are seeing many borrowers take up our 25-year loan terms (30 years on request) to lower their monthly loan repayments and improve cash flow. We do offer shorter terms, but as part of a longer-term facility. We believe this structure provides greater assurance for borrowers in the event that plans to pay off a short-term loan do not eventuate. Who saw COVID-19 coming?
Our non-revaluation policy is another way of providing greater comfort and security for SMEs. It means that if property values start to fall, provided a customer’s loan repayments remain up to date, there are no technical defaults or revaluation requirements needed.
Similarly, our ‘no annual review’ policy allows customers to focus solely on their business rather than continually having to prove their financial position for no benefit. Provided a customer’s loan repayments remain up to date, there is no need to worry if their 2020 financial statements have fallen short on previous years because of COVID-19.
Ultimately, we know there are many more challenges to face in the weeks and months ahead. It will be more important than ever to work as one in responding to these challenges, whether that’s as an SME, broker, lender, landlord or investor.
These are unique times. They call for unique solutions backed by experience.
We’re ready to help. For any advice or to discuss a specific situation, please talk to your Thinktank relationship manager today.