Why it makes sense to spread your debt.
It’s more important than ever not to keep all your eggs in one basket.
These days whilst spending extended time “on hold” when calling the bank might be inconvenient and annoying, there is a more insidious potential consequence of having everything with the one lender.
Let’s say that Dr A. has a home mortgage with BANK No 1 which he has had for many years. He also has an investment property loan, a practice property loan and a car loan all with BANK No 1.
In his practice he has a new business partner, Dr B. Dr B’s home loan is with BANK No 2. Dr A and Dr B have taken and guaranteed equipment & fit-out loans, overdraft and business credit cards, again all with BANK 1. These have been taken as “Joint and Several” loans. BANK No 1 now has a huge amount of control over the practice, which neither Doctor fully realises.
As Dr A represents a large dollar exposure to BANK No 1, he is subjected to annual Bank reviews of ALL of his facilities. One day something happens out of the blue, which puts pressure on the practice’s perceived ability to make payments on the equipment and fit-out loans.
Bank 1 starts to get nervous, given the large dollar exposure and starts asking for reductions of overdraft balance and limit. This puts more pressure on valuable cash flow and the Bank starts eyeing off assets for possible repossession and sale.
Dr A has the view that each asset loan is separate and non payment would result in the repossession and sale of THAT asset. He also has the view that Dr B is 50% responsible for the joint loans.
BANK 1 has a view that ALL LOANS are SECURED BY ALL SECURITY and as they hold Dr A’s HOME LOAN and other property they can repossess HIS real estate.
An important note here is that as “Joint and Several” debts the bank can choose who to pursue and to what extent.
BANK 1 now has a number of choices including,
- Do nothing and hope for the best
- Place the clients in the “at risk” / “bad bank” category, hiking interest rates at will, and hoping the client will refinance somewhere else. Something that’s very difficult to achieve given the current cash flow situation
- Reposes assets and have a “fire sale auction”.
So what could the Doctors have done differently?
At any stage in their borrowing life they could have spoken to a skilled, specialist finance broker, who would have spread the different debt facilities across a range of lenders. Both clients and the business still use a main bank, but the key is to use the bank for what they are good at and within very concise boundaries. Specifically they should not have taken business lending with the same bank that held the directors’ home loans. Interestingly in this case DR A unwittingly gave Dr B a “free ride” security-wise.
Spreading the debt also gives a number of banks a smaller dollar exposure and the annual reviews are much reduced.
At Healthcare Financial Strategies we treasure the LIFETIME VALUE of every client and hope to write many loans for each of them in the future. Each new piece of equipment, investment property, speedboat, motor vehicle loan can be considered across many banks at the time of purchase.
Importantly no single bank has too much control over the business. In short it’s a strategy of having a finance advocate to keep the banks hungry, keep them keen and most importantly keep them Honest. Remembering the winning bank pays the broker for the introduction. The business owner usually doesn’t pay the broker a fee.
So what was the event out of the blue?
Well it could have been anything but a few examples are:
- Change of bank manager,
- Change of bank policy,
- Fire or Flood,
- Illness or injury,
- Sudden strong competition,
- Adverse press,
- Marital separation,
- Sudden partnership breakdown.
There are many more. Obviously some events can be insured against but some can’t.
Healthcare Financial Strategies strives to keep our clients successful, prosperous and borrowing and we will provide valuable input to keep clients on track and in control.
Steve Daley 0413 619 824