Key Learnings and case study of the Week 04.03.2024

Construction loan for a kids playground business in Adelaide

Last week I touched base with an existing customer of my who operates a kids playground business in Adelaide as he was exploring the option of obtaining a construction loan to renovate this existing primary residence. The fact that he is thinking of making improvements to his primary residence means that his business must be travelling as well as initially forecasted. He also sounded a lot calmer and much happier on the phone.  I googled his business and there are over 160 reviews on google review with an average of 4 stars. 

The juxtaposition of his business one year ago when it required funding (deal settled the same time last year) to how well it is operating currently is a testament to the applicant's management team and the well execution of his business plan. 

Customer was referred to me by an existing customer based in Adelaide. Customer initially seek funding from a major bank for a shortfall of $ 695K- (which included fit-out as well as kids playground equipment). He submitted the application directly to one of the major banks in April with everything that they required including a business plan and cash flow forecast. The bank declined this finance application in late October after many backwards and forwards with requesting for further information. In reality, applicant should have been informed a lot earlier with the funding appetite from the major bank. In essence;

Rationale for Decline 

• Start-up business (new Venture)

• No security offered against $ 695K worth of fit out as equity from primary residence had been max out. 

• No secondary market in the event of default for assets as such fit-out and kids playground equipment.  

In November, I quickly put together the finance application and the deal was approved before Christmas with funding occurring in late February. Prior to the approval granted, customer had suicidal thoughts as he had divested all this funds in having the business started. The customer had also committed to the lease to where the business will be operating.  The shortfall of funding was driven by;

• Cost of labor had gone up with workers difficult to find.

• The cost of materials increased mainly due to COVID restrictions in China (30% increase). 

• Unlike residential construction, customer could not enter into a fixed price contract hence he was not insulated from price increase.                                                                                        

Rationale for Approval with another Funder 

The financier (non-bank) which I located to fund the equipment accepted the proposal based on.

• Applicant had an existing trading business (2-dollar amenity shops x 2) which generated good earnings.

•  Through explanation of the rationale to why and how he got into the present predicament.

• The experience level of the management team and consultants 

• Servicing was also demonstrated (based on actual rates) of how his existing business had support the proposed finance commitments.

• The fact that the business would attract a natural buyer (especially competitors) who would purchase this business as a going-concern given the amount of capital invested in setting up the business.  

• No security was offered 

Commercial Land value and occupancy rate

Last week I attended the lunch hosted by Westpac and one of its panel valurer. It's quite interesting to note how much the commercial land prices have increased over the years especially in Melbourne's North. 

The occupancy level in Fy23 is also extremely low with industrial vacancy underpinned by heightened warehousing needs and 3PL operations.

One of the major banks is undergoing restructure at the moment and all the business and commercial bankers have to reapply for them job in April. Service level is blowing out as bankers are unincentivized to work until they have a bit more clarity with their employment position. This means that the bankers wouldn't be hungry to take on businesses. Beware if there is a settlement that's happening for the customer if they already bank with this major bank. 

Keith Ho  MAF, B.BFin

Director

Ho Finance- Finance Made Simple

Australia & New Zealand

LVL G/575 Bourke Street

Melbourne Victoria 3000

Australia

E:  [email protected]

M: 0457 451 107