Banks have and will continue to change shape. In this fortnights update we talk about the changing nature of big banks and what finance options businesses have to survive any more lockdowns.
Locking in options
NSW and many parts of the country has been placed into more lock downs and this will severely impact every ones lives and could be the end for some businesses.
The NSW state government has responded to a recent surge in virus cases by ordering people living and working Greater Sydney with stay at home orders, effectively shutting down workplaces for the majority of the state.
Whether you agree with this decision and course of action is up to you, but we could all agree that there will be some people more affected by this than others, and some of the biggest losers will be small businesses.
It is wise to assume that until the majority of the adult population in NSW, maybe even Australia, is reached then lockdowns will continue to be a method by government to try and solve the virus crisis. This means businesses should forward plan and think about what capital they need over the coming year, not just this winter.
Almost on the anniversary since Sydney came out of the first ever lockdown we go back into one but this time there is a key difference.
There is no JobKeeper.
You will remember that JobKeeper was a payment from the federal government, not state level, which was made available to pretty much every business to help support them and keep staff employed. The government estimates it spent around $90 Billion on this program, and it was money well spent.
Without the JobKeeper payment in 2020 the state and even country wide economy would not be in the sharp recovery boom we are currently experiencing but probably a long protracted decline into a recession.
We are lucky the government went hard with payments and targeted incomes and businesses.
There is a separate discussion to have about how that debt is managed and if it will cause future issues but that is for another time.
For now, it is important to recognise that JobKeeper is finished and that means the death of many small businesses.
The NSW state government is offering some money to businesses, up to $10,000 if there is a turnover reduction of 75 per cent, $7,000 for turnover reduction of 50 per cent and $5,000 for turnover reduction of 30 per cent. Nowhere near what JobKeeper alleviated though. There are also special support programs for hospitality businesses which is great to see as they have been disproportionately negatively impacted.
One financial aid that is available again to people and businesses is loan repayment holidays, but it is wise not to take this option.
Last year we were being told that millions of Australians might get sick or die from the virus and the banks offered repayment holidays to anyone who asked. This helped a lot.
The thing that many people did not realise is that by taking the repayment deferral you ‘technically’ entered into a hardship arrangement with the bank, and that puts a black mark against your name.
Most lenders understand when they see the loan repayment deferrals from 2020 and will still be willing to offer you a loan as long as you can demonstrate or explain why you took it and why the business is better now.
This time around though, if a business takes a repayment deferral it could be detrimental to their future as lenders and banks will likely be much less understanding and willing to lend to a business that ‘technically’ entered into a hardship agreement.
It is best not to take any loan repayment deferrals if your cash flow can support the continued repayments.
So, what can business owners do to give themselves breathing room and options?
Establish a working capital facility.
There are many types of products that could be used here. From property secured lines of credit, unsecured business loans and invoice finance.
The aim of this is to give you capital to use for day to day expenses such as paying staff, suppliers and even rent or other costs. It allows you to have more capital in the business than just cash, and that difference can be the difference between a surviving or thriving business.
Rates, security, and costs vary wildly across the different products and it is important to select the right one for your business, this is something Skyward Financial can help with.
Give yourself room to breathe with access to additional capital.
Make a cash flow forecast.
How much money do you expect to come in each month and go out each month over the next year?
This is a question that you need to be able to answer and putting it into a cash flow template can really help a business owner to track their performance against these forecasted expectations and targets.
Often when you are applying for a substantial loan the lender will require this to be done, but proactive business owners should have one of these already, if you don’t we have a template you can use so Let’s Talk if you need to make a forecast.
Be proactive to know what your cash flow looks like.
Use efficient debt.
We have talked before about fast money vs slow money and planning ahead can save you money.
If you plan ahead and do things like make a forecast you could see where a potential shortfall in cash could arise and put in place a working capital facility, but if you don’t plan ahead and need the money urgently it is going to cost you a lot more.
For example, if you establish a property secured facility now the rate could be between four and seven percent. If you wait until the last minute the interest rate will be between thirteen and twenty percent.
That cost might be worth paying to plug the cash flow hole and keep the business going but it is an unnecessary additional cost if you plan ahead correctly.
Use efficient debt in your business and plan ahead.
Shape shifting
The big banks are changing shape for a competitive and digital future.
Over the past few years since the royal commission big banks have been selling off parts of themselves to get back to ‘core’ business and resize to be more resilient and profitable.
This process of diverging from different markets to operate in followed a long period of consolidation as big banks bought up wealth management, mortgage broking, advice, superannuation, funds management and other retail businesses over the previous couple of decades.
The big banks all aimed to be a one stop shop.
In that shop you could get your credit card, home loan, bank account, superannuation, financial advice, and trade stocks.
It seems that shop eventually grew too big unruly.
In the banking royal commission the government found they were essentially stealing from and lying to customers in a systematic way that was culturally entrenched and remunerated for.
Now they do not want to be a one stop shop for everything but rather focus on a few specific things and do those things well so they sold parts of themselves off.
Among the fire sale to scale back CBA has sold the Aussie mortgage franchise, their wealth management businesses and insurance businesses. Westpac has sold life and wealth and asset finance. NAB sold their wealth arm.
Business model simplification is a standard playbook exercise after a period of reducing ROE and earnings from major incumbent players.
Just look at energy markets, banking, FMCG and utility providers in the UK and US over the past five decades.
This is a common eventuality as market forces such as regulation and competition erode operating margins and mean they need to refocus on their most profitable (core) lines of business.
In the case for Australian big banks they make a lopsided amount of their profit from home loans and small business banking.
We have talked before about how the big banks are devolving to simplify their business model and looking more and more like utilities and how tech companies are displacing them from customer experience providers and pushing them to the background. But becoming background number crunchers and ‘pipes’ to move money is not a fate that will be shared across all banks.
Divergent paths might lie ahead for the big four banks than ever before as they continue to shape shift.