Loan structuring: Have you explored all of your options?
Debt can be a healthy part of both your dental practice and personal financial portfolio.
There are many good uses of debt, to achieve a large range of goals.
When we first think of debt, we typically think of external 3rd party debt such as bank loans and facilities, equipment finance, overdrafts, supplier accounts, dental practice purchase finance, margin and investment loans, and credit facilities. All of these can have a positive role to play in your broader financial picture.
Outside of the more common forms of debt are other types of loans, such as borrowing from a related entity (if your structure allows for it), from family members, or indeed the issuing of debt to others (again, structure permitting).
Some key considerations in ensuring you have structured your loans correctly, whether you are the borrower or the lender, include:
- Have I used the correct entity within my group?
- Have I spoken to my advisor regarding any tax implications and legislative restriction or requirements?
- Have I matched the terms of the loan appropriately to its purpose?
- Have I selected the right type of facility to meet my objectives?
- Have I engaged the correct professionals to execute the loan structure such that it is successful in meeting my needs and goals?
- Have I considered the impact on my overall asset protection strategy and discussed this with my advisor?
- Is the security being offered / I am offering, appropriate (but not excessive)?
- Can I exit the arrangement when needed?
- Has adequate documentation been prepared?
The best way to understand the importance of the thought processes above, may be to examine some of the ways things can go wrong. The previous examples are quite oversimplified, but hopefully illustrate nonetheless, why structuring your debt position correctly is so critical.
- Rose is determined to build a property portfolio over an ambitious timeline. She acquires and develops numerous properties in quick succession. Interest rates rise, and to attract a better rate, she cross-securitizes the properties and rolls them into one loan facility. Market movements urge Rose to sell some of her developed units. Rose is unable to sell the units as there isn’t sufficient equity in the other properties to have the attractive unit released as security.
- Sally borrows for an investment property, a tax-deductible loan. The loan is paid down over the following years. Sally wants to visit family overseas, so draws down on the investment loan available funds. Sally doesn’t realise that she has interfered with the tax deductibility of the interest on her investment property loan.
- Johnny borrows money from his company Tucker Pty Ltd and uses it for personal use, without speaking to his advisor first. When Johnny meets with his accountant, they explain that he will need to meet the requirements of Division 7A under the Income Tax Assessment Act.
- Richie has funds surplus to his needs and is keen to pay down his loans quickly. Richie pays down his investment property loan ahead of schedule. Richie still has the loan on his residence. Richie has paid down a tax-deductible loan ahead of his home loan (not tax deductible), which has come with a tax cost as well as an impact on his long-term asset protection strategy.
- Jamie has a trading company that requires working capital to enable the company to grow. Jamie calls his banker and arranges a bank bill/market rate facility. Jamie is now paying interest to the bank and his missed the opportunity to consider utilizing another company within his group that has large amounts of available cash.
- Jack and Jill want to buy a home. Jack’s parents are happy to loan the money to Jack for his share of the home. There is no loan agreement or security in place as they are all family. 2 years later, Jack and Jill decide to part ways. As there is no loan agreement in place, the loan from Jack’s parents is therefore not considered as a liability when determining the net assets to be divided between Jack and Jill.
As you can see, there are numerous issues for consideration, all of which are interrelated and complimentary to one another. Navigating through these items is best done with your advisory team.
Cutcher & Neale Client Advisors help you find the best practice loan structure to provide the optimal outcome for your circumstances.