With operating costs and wages on the rise, business cash flow and development margins may be under pressure. But there are ways you can stay in control in the new financial year.
If you feel like the cost of running a business is starting to soar, you’re not alone. In May 2022, 46% of Australia’s small businesses said their operating costs had gone up – while 54% of construction businesses said they were also grappling with supply chain challenges.
At some point, those additional costs will need to be passed on, or projects simply won’t be feasible and business profits will be eroded. At the same time, business owners are looking for short-term capital to ride out unplanned revenue shortfalls or expenses – or make the most of new opportunities, such as the purchase of distressed assets.
Assetline Capital Director Andrew Vamvakaris says cash flow can be a challenge for developers, with revenue under pressure from a softening in the property market. “Higher input costs and labour shortages are putting pressure on cash flow, while sales may be more challenging after two years of significant growth,” he says.
CoreLogic data suggests Australia’s property market is showing its sharpest slowdown in decades. However, unit markets are holding their values better than houses – and in Sydney and Melbourne, unit rents are now rising substantially faster than house rents.
Andrew expects to see opportunities for medium-density apartment prices to lift in Melbourne and Sydney, with investors and owner-occupiers competing for more rentable dwellings – and the return of international migration, including students. “People will always want to own property in Australia. But in this market, what they can afford to buy may have changed. It’s no longer a detached dwelling,” he says. If developers see an opportunity to move on an ideal site in this market, but need to buy time for settlement, a bridging loan could be the answer.
Bridging cashflow shortfalls
In a more challenging economic environment, unplanned expenses can have significant consequences. Sydney-based accountant David Cox says some of his small business clients are under pressure to set up payment plans with the tax office. “The ATO is now chasing overdue payments after putting collections on hold during the 2020-21 COVID response,” he says. “But you can’t ignore problems as they emerge because they aren’t going away.” David says that’s where having access to short-term finance facilities, can make all the difference. “If you’re operating in uncertainty, you want to give yourself options,” he says. “It makes sense to have a facility available to get through a short-term issue or seasonal cash shortfall.”
If you’re operating in uncertainty, you want to give yourself options. It makes sense to have a facility available to get through a short-term issue or seasonal cash shortfall.”
Andrew says he’s currently seeing a range of ‘last minute’ scenarios where a bridging loan makes sense. “With unplanned ATO debt, it may be simpler to pay it off with a bridging loan, and then use cash flow to pay off the loan at term,” he suggests.
Another common bridging scenario is when a property contract purchase has become due, but the lender’s LVR is now lower than expected. A bridging loan can help you secure the property – and capitalise on its future potential.
“A short-term loan might cost you a bit more in interest, but it buys you time to refinance – and you’re in possession of the asset rather than having 100% of zero,” says Andrew. Sharemarket volatility has also triggered an increase in margin calls. “If an investor has margin loans on certain stocks in their portfolio, a bridging loan can help them avoid the automatic sell provision when the market is down, by tapping into their property equity,” he explains.
Thinking strategically about debt
Andrew says borrowers should be aware that lenders are not simply lowering LVRs they are prepared to lend to: they are establishing a buffer in the event prices soften. “If our due diligence suggests an LVR has a potential to lift from 60% to over 70% given the market volatility, we need to factor in that contingency.” He is working closely with Assetline Capital’s credit teams to ensure every offer delivers on its promise – and can be banked in 48 hours.
“We’ve come up with a ‘micro-LVR management’ strategy, which is a more nuanced approach to risk assessment,” he explains. If a project is in a metropolitan area with a high volume of recent transactions, the credit team can be more confident in the valuation and provide a higher LVR. He also recommends borrowers are clear on their bridging loan exit strategy. David says that’s where having real-time access to financial data can pay off. “In business, time is money. If you’re waiting for access to documentation or bank approvals are delayed, you could end up paying more on interest in the long run.”
Having fast access to short-term capital can help you make strategic business decisions with more confidence. That’s why it’s never been more important to have financial partners you can trust to deliver on their promise – and provide transparency on their decisions. Because that’s one thing you can control in an uncertain environment.
If you have a construction deal you’d like to fast-track to make the most of the market opportunities, please get in touch.