Financial planning is really about… keeping the bankers honest

(Our apologies to Don Chipp for stealing this title – although we did tidy it up).

While most financial advisers are not credit advisers, their knowledge of their client’s financial affairs mean that they are well placed to keep their client’s bankers honest.

Here are some useful tips that advisers can share with their clients.

Research the costs before you sign the contract. Make sure you know the interest rate, the principal repayment rate, the administration costs and the penalties for early repayment.

Shop around. The first offer is unlikely to be the best offer. Look for the best deal.

Make sure that your finance application is clear and to the point. Support it with recent accounts, company searches, business plans and similar documents where necessary. These materials are best included as appendices to the main application as they may cloud the message you are trying to deliver. If the loan is for business or investment purposes, stress this, as it may be relevant if the ATO questions the deductibility of any interest claimed on the loans down the track.

Ensure that repayments can be met out of your existing and expected business cash flows.

Do not borrow too much. Most banks work on a debt to equity ratio of about 70:30. But in working out the value of your equity they discount historical cost by factors representing their expected resale experiences. Take account of these discount factors before you commit yourself to a transaction. Ensure that your finance application includes all relevant materials.  This should include all financial information that does not favour your application. If something goes wrong later on and the bank finds out that you withheld certain information then, to say the least, tempers could rise.

Keep the communication channels clear. If something does go wrong, tell the bank straight away. This is important because banks do base their recovery actions on how they perceive the borrower to have behaved. Trust is very important with banks. If your word is your bond then you will get much better treatment if an unexpected situation arises. For example, time and time again we have seen banks extend an existing facility over the ‘phone without any extra security when an investor has asked for it, whether it be to use as a deposit for a new property or whatever. Because trust has been established the banks will come to the party and help you out where needed. Open and honest communication is the key to building this sort of a relationship, and once it is created, don’t waste it!

Most banks will be reasonable if clients are reasonable with them. 

The Dover Group