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When I was a young trainee Chartered Accountant of 19 we had no money in my family, widowed mother and twin younger sisters. On the way to an audit job I discussed with my senior the prospects of Mum or me borrowing some money from the bank . I’ve always remembered his words -“You should never borrow for consumables. Only borrow for capital expenditure on some asset that will last for long time like a fridge, car or furniture.” We may have been considering a washing machine, radiogram or to have the house painted. I painted the house myself anyway.

Whatever it was, I absorbed the message very well and I have never borrowed money for any reason other than to buy and asset. It is generally important not to borrow money to cover farm losses. Better to stop spending and stop the losses.

Decades later I hunted around for a property on which to run sheep and found one in the middle of NSW for which we were able to pay cash. We loved it. Wool prices were good and so we made reasonable profits there.

But I wanted to protect against drought so I built a couple of smaller dams and then decided on a 20,000 yard dam in a large paddock. I learned about “spreader banks” to catch the water and spread it over the paddocks. Great idea, so I borrowed from the bank and spent a good bit of money on it and the dams. In the end the spreader banks did not do what we hoped and sheep would have done as well out of a 5,000 yard dam there instead of the 20,000 yard .

When I subsequently purchased beef cattle property originally settled by my great-grandfather I became enthused about cell grazing and fenced one valley into cells. Because I spent half my life on the road driving around NSW consulting farmers who were in trouble with banks and getting a good hunk of their debts written off, the cell grazing could not really be properly managed. For all the years it operated I do not believe that we ran one extra cow in those paddocks. It was not the fault of the cell grazing system.

I chalked them up to experience. They were not good investments because I had failed to do my homework and see what would work for me in my circumstances.

Those two were about my only bad capital purchases. A visitor one day remarked that he liked the farm, adding “but the only problem is that the fences are all the same age – old.” I replied that I ran the farm to earn income, not to make it look good. As I grew older and we sold off blocks to keep the place to a size we could manage on our own, I confirmed that new fences would not have run more stock or increased the sale value.

But if you are fencing or building sheds or even buying the block next door, on a bank loan, do the sums. Work out what it will cost and how long before you get your loan paid off out of the extra profit you earn. If you are not good at figures, sit opposite your accountant for half an hour and you should have the answer. If not call me at GBAC and I might be able to tell you over the phone for free.

 

Don’t borrow for day-to-day running costs

For farm debt to produce a profit it is generally better to fund operational expenditure out of cash in the bank. It is not good to borrow to cover farm operational expenses except in the rarest of circumstances.

If it becomes necessary to borrow to cover such expense as fuel for grain producers or feed for stock, there is a big risk that a crop failure or a stock price fall may result in residual debt. That then has to be cleared from a future season. All it takes  to turn anticipated profits into losses is a bad season, a fall in prices or some other calamity. Frequently even the cost of substantial refencing is not recovered and in many cases it is better to just repair the old fences.

I have spent plenty of money on running costs that I thought would be profitable only to find when I monitored results that the anticipated profit did not eventuate. The consequences of a mistake can be much greater when debt is involved. Sometimes we borrow to make operations easier and faster or become more productive. Then we have more time to spare and end up spending more money on whatever we do to fill in that time.

For most of my farming career I have felt that the less I borrowed the more money I made. We farmers always want to be busy and being busy often involves spending money. Frankly there is considerable merit, once the farm is working well and producing recurring profits, in spending a bit more time sitting on the verandah and enjoying the view. It is seeking to make a farm more profitable that often directs much of the profit to the moneylender.

Next hint will be about borrowing for capital expenditure.

Note: everyone’s circumstances are different. These are just general hints. To check what is good for you please consult your accountant or a GBAC consultant

Get the right loan for you at the time!

Borrowers have a tendency to stick with the bank they know. Up to 1987 that was a good idea. The bank manager knew each customer and was as much a financial adviser as anything. The manager would rarely lend any customer into trouble, was not paid very much, but was greatly respected in the community. Banks were regulated in their behaviour by government so that they served Australia and Australians. De-regulation by politicians in the Hawke/Keating era changed all that.

Profit gradually dominated bank behaviour from then on and has led to a stratospheric rise in bank profits with bank CEOs being paid up to $1 million a month. It has also been catastrophic for many bank customers.  Every dollar of CEO pay and bank profit is a dollar lost by a bank customer. The Royal Commission discovered the extent to which banks have deliberately lied, cheated, abused and defrauded their loyal customers.

Hint number 1 for turning debt into profit is to get the right loan in the first place. To do that a borrower can invite every possible bank to offer their best loan. In 1987 I invented the Moneygram system for making that easy and we have refined it since. Most farmers look for quality stock, hay or seed before price, but do not apply the same rigour to loans. It is only later on that many discover flaws in their loan deal. It is each term in the loan contract, not just the rate of interest, that is important. Many lawyers do not know what to look for in that respect. It takes a knowledge of accounting and farming to to that.

One GBAC client was given a 15 year loan to refinance a debt secured by a mortgage over two of his farm properties. When the government caused a crisis 6 months later and livestock could not be sold to cover planned loan repayments and farm expenses, the bank “kindly” gave him a 10% increase in the loan, but insisted on a new contract for the whole amount combining the old and new loan. Without drawing it to the borrower’s attention, the bank slipped into the middle of the contract a clause requiring one of the properties to be sold within 12 months.

Even if they had seen that clause the customer could not have refused the revised contract without defaulting given the prevailing circumstances. The loan money had been spent. Nobody would have refinanced at that time in that climate of financial fear on farms. The bank would take the proceeds to clear the mortgage on that block.

What a surprise for the farmer to discover that he had inadvertently agreed to sell his largest property, which would make the remaining debt very difficult to service!!

We have seen different banks all around Australia treat customers like that as profit became far more important than the lives of the borrowers and their families. Make sure the contract you sign gives you the best possible loan.

The next hint, No 2 will be about what should and should not be financed by debt.

Farmers all over Australia carry substantial debt along with their livestock and crops. Often it comes from buying the farm from the family. We tend to find that inter-generational transfer of farming done without bank involvement works best. Banks make huge profits by lending farmers money at substantial interest rates and large charges to buy farms. That money is then paid back into  the banking system by the seller at a far lower interest rate and without the extra charges that go with a loan. That yields bigger profits than your best season’s crop.

Decades ago when moving from sheep to cattle and buying my own place for a lot more money than I had, I arranged a 20 year interest-free loan to purchase a family farm from a relative. The trade-off was that he could continue to live in the main homestead, while we would live in a workman’s cottage, for as long as he liked. He enjoyed that for 7 years and we enjoyed his company experience and advice. Then he moved out and we had a superb homestead and the farm to ourselves. In 20 years we had paid it off. My Chartered Accountant brain was happy. We built into the loan agreement provision to cope with droughts, floods and other disasters. Every 5 years we had to ensure that a quarter of the debt had been repaid. In between we could defer the odd payment if an unusual event arose. It was a strain to pay it off but it worked well. The thing about family loans in passing down a property is that firstly the older generation does not need a bucket of money all in one go and secondly it cares deeply about the younger generation and will understand any unexpected loan repayment issues far better than any bank.

Many farmers who have used bank finance to buy their farm or add another block, even buy stock, report problems with the bank in hard times. Around Australia we have just suffered devastating bushfires, drought and floods. In 2011 the live trade suspension spelled disaster for many cattle breeders from which they struggled to recover for years. Predatory banks saw an opportunity to load up already indebted farmers with more debt then charged extortionate penalty rates of interest as payments could not be met. Penalty interest made it even more difficult to meet repayments so debt grew and grew so that eventually the bank could sell the farmers up and gift their friendly receivership firms a few hundred thousand dollars in fees paid by the farmers in the process.

Standard practice for many farmers in such a position is to desperately flog the farm in order to meet loan payments and try to ignore threatening letters from the bank. This causes massive stress on them and their families and makes the bank as angry as poking sticks at unfriendly bulls does. Far better is to deal with the underlying problem which is excessive debt aggravated by abnormal circumstances. It was a Rural Counsellor in Dubbo NSW who set me on the right path. One day after referring another of her clients to me she remarked “If he’s got noxious weeds don’t let him treat them. They devalue the property and discourage the bank from foreclosing. Most farmers who have a beef with their bank inflate the value of their property. That just encourages the bank to sell them up. Leave it as run down as possible then negotiate a partial debt write-off and refinance them elsewhere.” That clever lady taught me a lesson that has benefited farmers in every state and territory of Australia whether in farm debt mediation or not. What I then learned from that was that money lenders write off debts just like fruiters throw out the fruit that goes bad and bakers sell off cheap yesterdays stale bread.

So when you have a beef with your bank don’t back off any more than this black bull would do. But be prepared to crack the whip and let the bank know that you, the customer, are in control.  This guy was very friendly from birth, but I never moved him on foot without a whip in my hand. That is a good way to handle your bank too. There are ways to make that easier which I will discuss some other time.

Over the decades I also discovered that when I reported dishonest banks for malpractice to every one of the 225 Members of Federal Parliament, that led a storm in the boardroom, action by authorities or a Royal Commission. None worked well for uncaring bankers sticking pins into troubled farmers. There are plenty of good bankers out there and in my next blog I will talk about getting to them.

Greg Bloomfield
www.gbac.com.au

The Financial Review, The Land and capital city dailies like Sydney Morning Herald have carried extensive analysis of the Federal Budget. Our loan consultancy GBAC Advisory has been looking through the pages and commented on the complexity of borrowing. We worry that banks so ready to lend money for businesses, homes and farms may turn nasty and look to foreclosure if the borrowers can’t meet repayments. Never let a bank foreclose on your hard earned assets.

Interest rates are almost non-existent which is prompting a lot of borrowing. It is easy to forget the days not so long ago when a farmer called us about his $1m loan on which he was paying 24%. We did great things and got him the loan at 18% earning him a $300,000 profit over the term of the loan.

Government ( taxpayers) is supporting a lot lending. It will be interesting to see what happens when numbers of those borrowers run into strife. We tend to think that the government may come down on the side of the borrowers if the government is guaranteeing the debt. One reason we have been able to help farmers and business owners convert debt into profit through debt discounting is that we have  a unique method of involving Parliament in supporting borrowers who have been treated badly, in fact in supporting anybody who has been treated badly. That particularly relates to borrowers heading to mediation, farm debt mediation or receivership.

Don’t hesitate to call some consultant for assistance if your debt causes you problems. There are few problems that cannot be solved.

 

Never heard of a  Doom Loop? Not surprising! But it can catch you too.

“Doom loop” is when banks get dragged into serious financial trouble by non-performing loans to governments that have grossly overspent. In the GFC it was solved by other countries bailing out those like Greece.

There is a similar doom loop created when Australian businesses & farms have the loop gently lowered around their necks by clever bank marketing of unaffordable loans. The borrowers, years later, get dragged into receivership or bankruptcy by those banks.

We converted GBAC  from a Chartered Accountancy firm to a bank loan consultancy when we saw the disaster unleashed when our politicians de-regulated banks. Bank profits and CEO pays have skyrocketed and Australians mostly pay a bit more for everything because they borrow for it or prices are increased to cover charges of “non-interest” lenders. Borrowers can lose everything they have spent decades working for

It is no fun for business and farm owners to suffer for years when caught in the Doom Loop. They usually work their hearts out to keep abreast at least of interest at penalty rates but then in the end are often sold up.

That is quite unacceptable. Moneylenders are the experts at assessing the ability of borrowers to repay loans. Borrowers usually only take mortgage loans once or twice in their lifetimes so they are nothing like as familiar with loan failure as the bankers. What really gets us is the way in which reputable banks lend into situations where it is glaringly obvious that the borrower is going to fall over sometime. The bank will have earned penalty interest for perhaps decades and then sells the borrower up because it has not all been paid, when the loan might even be double its original size due to that unpaid interest and charges. Current relaxation of Australian laws facilitates the creation of a Doom Loop.

The remedies are:-

1. Use an “own broker” service like loanagram to convert bank charges into profits. It is not like a broker who is paid thousands of dollars commission by the banks. It costs only $250 and allows you to offer your loan business to a number of banks who will then compete for that business. Competition amongst banks gets you the most suitable loan at the best rates. It can also allow you to save thousands of dollars in set-up fees which would otherwise be used to pay the broker who introduced you.
2. Have a professional loan application prepared to show banks that you are going to be just the sort of customer they want who will service and repay the loan in accordance with the contract. That makes negotiations more profitable.
3. At the same time obtain a Loan Suitability Assessment to ensure that the loan is tailored to your business or farm needs. That is the key to having a loan that is easy to service and repay even when times get tough.
4. For long term loans it pays to have a professional review every 5 years or so to ensure that the bank is doing the right thing by you. Far too often the loan is set up so that after a few years the bank can make changes without the borrower being aware of it.

If you want to check out anything to do with loans please feel free to give us a call at GBAC Advisory on 0428 417 496

Default
It is a difficult concept to grasp but a great deal of bank debt on loans that are in or nearing default is really accumulated interest that has reduced business or farm profit whilst being accumulated onto unpayable loans. That itself reduces future profit to service debt and so the cycle collapses on itself.

Dishonesty
When GBAC researches the background of debts that are in trouble we frequently find that the borrower has been seriously misled, sometimes defrauded by the bank. The recent Banking Royal Commission revealed the staggering level of dishonesty in the banking and finance industry. GBAC has been aware of it and dealing with it since 1987 when banks were deregulated and allowed to do pretty much anything they liked to customers as long as it made big profits for the banks and big pay packets for the CEOs. Politicians issued them with licenses to print money and rob customers.

Debt turned into profit
But we are able to turn the tables in many instances and have the banks write off some of their ill-gotten gains. We have over the past 30+ years seen vast amounts of debt turned into profit.  A few examples are $5 million from a $30m loan facility, $1m offered from a $7m debt; $700,000 from a $1.4m farm loan and $650,000,the whole of one retail business debt, completely turned into profit.

Borrower wins
When banks act dishonestly under the direction of dishonest directors who know they will not go to gaol because they are protected by politicians, those banks deserve to write off dishonestly acquired debts. When we agree with a bank to have that done, it in fact delivers fresh profit back into the hands of the borrower.

GBAC
There are plenty of people out there who claim to help bank customers who have large unaffordable debts, but few of them have the persuasive powers that GBAC does.  We are qualified Accountants, we have run our own businesses and farms and we have a passion for fair treatment of Australians by those they trust and deal with. We also have a secret weapon against predatory bankers. All of the solutions we obtain are the result of the bank agreeing with us about the mistreatment of their customers and the amount of debt to be written off. We do not ever reveal the names of the banks who have been kind enough to deliver this unexpected profit into the hands of our clients.

Friends
If you have business or farming friends in trouble with banks, suggest they make contact via our websites www.gbac.com.au/business or www.gbac.com.au/farm . It costs nothing to have a chat about whether some of those debts might be converted into profits.

 

Parliament passes laws to favour the moneylenders, some of whom make big donations to political parties. More importantly they tell politicians what they want done. When you are dealing with debt sometimes you need fairer laws and sometimes you need to report unfair behaviour. If borrowers want to be treated fairly, they can use the power they have to influence the politicians who make the rules, to deal with what the borrowers know from experience about unfair lending.  There is a very effective way to do that, but first read what a wise Athenian said about knowledge:

“Having knowledge but lacking the power to express it clearly is no better than never having any ideas at all “- Pericles (Athenian statesman)

Together FairGO, Votergrams and Voters Network give every Australian all the power and influence they need to start shaping Australian Society and bank loans in particular.

You can speak up too, in the right way, to the right people, at the right time. We have helped Aussies do that for the past 35 years, avoiding media or public attention to focus on quietly persuading the decision-makers in parliament.

That is in addition to GBAC helping borrowers obtain fair treatment from banks.

It is predicted that thousands of Australians are about to lose their jobs because the businesses they work for have not taken up the Federal Government’s offer of assistance from experienced insolvency experts. As a former Chartered Accountant I have mostly seen “insolvency experts” charging outrageous fees to close businesses down rather than revive them.

My solution has always been to obtain an aged list of creditors and contact each one to negotiate an acceptable payment program. They mostly want to keep the business afloat too, because they want it as a continuing customer. I would also get a list of debtors and give the oldest ones a call to see if we could negotiate a plan for them to pay the business what is owed. That would usually produce cash much faster than happened when the business owner was to busy or afraid to call them.

Next we would have lengthy discussions with the business’s bankers to make sure they looked after the business well and that the business honoured its obligations to the bank.

Then with a budget that was checked monthly against actual performance and strict limits on spending that did not produce fairly immediate revenue, we would see the business turn around and flourish.

When businesses suffer acute liquidity problems there is usually a fairly easy solution. Many debt problems relate to bad borrowing or spending decisions in the first place. If your business is in strife let me know and let’s see how quickly it can be turned from cash shortage to cash surplus and from loss to profit.

Greg

Borrowers “Brokers” are more important than ever now that the government is putting responsibility for being able to afford loans onto the relatively inexperienced borrowers and away from the highly experienced and qualified bank risk officers. The bank-paid brokers are on the bank’s side because the banks pay them.

That means banks will foreclose more often and more easily. Borrowers often do not understand the consequences if they pay off their business or farm loans for 10 to 15 years and then some adverse circumstance like illness, drought, flood or fire causes a major loan default and the bank sells them up.

Then all those years of repayment can go down the drain because the bank engages expensive insolvency experts, receivers and lawyers whose astronomical fees absorb all the repayments and capital gains.

It pays to have a firm like GBAC Advisory give your loan an independent, inexpensive, annual or biennial “Compliance check” to  ensure that borrowers have not left themselves vulnerable to foreclosure any time the bank feels like it for the breach of some obscure loan term they did not know about.

Catching problems before the bank does is the key to making the loan work for the borrower as well as the bank