In April last year an old school friend contacted me. He had, quite deliberately, placed himself in a very stressful and quite dangerous financial predicament. He was working with his accountant to find a solution but he wanted to double check with us as trusted advisers.
The friend – let’s call him Andy – had accumulated property and wealth over the years. He runs a car service related business in the lower north shore of Sydney as well as owning a freehold petrol station nearby which he sublet to a tenant.
Andy is the type of guy who will seek advice from a wide range of sources but will always dance to his own tune. He backs himself and tries to manage all aspects of his business himself. Including finance. He follows this path because it has been a successful formula for him. But, as you will see from this story this has placed an enormous amount of stress on him and his family.
Andy’s home and businesses are mortgaged by two different lenders. A couple of years ago and without telling his business bank he had demolished the building on his petrol station site, replaced the leaking petrol tanks with modern ones and built a modern building on the premises which he could now sublet to 3-4 tenants. In short, he had added value. The way he had achieved this was to increase his home loan.
If all of that wasn’t enough to give you a coronary, Andy had also placed a deposit on the building that his current business occupied with a deferred settlement. Oh, and he was also starting a new car component business and was in negotiations with a major supplier to be the sole supplier for his region – this business would be one of the tenants. Further, he was negotiating with an oil company for a long-term lease of the new updated petrol station.
I know what many of you are thinking. That’s a lot of risk and a lot of stress. However, it’s people like Andy who make our economy a success.
He needed over $3m in new debt and a refinance of his current debt and some breathing space – in all just over $5m. Quickly.
However, as he had only recently completed the buildings on the petrol station he had no income to declare against that investment but was quickly signing up tenants.
Adding to the complexity, Andy was insisting that he keep his home loan and business lenders separate. Which meant that the property security in his businesses and the income generated by them had to be enough to satisfy the banks.
His accountant had advised him to find a new lender and change the lot for fear of aggravating the relationship with his current business bank (the petrol station lender). The accountant correctly reasoned that Andy’s agreement with the bank was in breach and it was likely that the bank (a major Aussie bank) would foreclose.
Whilst the accountant’s reasoning may be quite sound in some cases, it was guess work based on previous experience – namely during the GFC.
The accountant in question was no slouch. He is a highly respected managing partner of a mid-tier accounting firm. Whilst I have a lot of respect for his accounting nous, I felt he wasn’t up-to-date with his banking knowledge.
In any event and to cut a very long and complicated story short, Andy followed his accountant’s advice. Why wouldn’t he? He’d been with him for many years. The accountant had told him our advice was “radical” and may place his business and home at risk.
Our advice was based on a conversation with his existing bank. They assured us they wouldn’t foreclose because he had improved the property. They weren’t happy about not being told but because we didn’t disclose Andy’s name or address no action could be taken.
In short, Andy and his accountant did not trust the bank to not foreclose. We wished them well.
Last week, Andy contacted me again. After following the accountant’s advice for many months it became apparent that he was risking everything without success. He took a chance and went and fessed up to his business lender. Lo and behold, they welcomed him with open arms and looked after him like we said they would.
Andy wanted to know if it was too late for us to be included as brokers on the transaction – so that we could be paid. It was but we wished him well. Crisis averted.
This example is a difficult one for us. It was complicated further by the use of another broker to give Andy advice – we’re not sure if the broker was aligned with the accountant or not. It was clear to us that the other broker wanted to move all of Andy’s debt to maximise their (the broker’s) commission.
In the end, Andy’s nose for good advice got him through.
We have a few accountants who refer business to us from time to time. In each case we have demonstrated – because we deal with banks on a daily basis – our up-to-date knowledge is superior to theirs.
More importantly, many accountants merely refer you to their own bank. They may/may not have a referral agreement with that bank where they’re paid to do that. If they do they have to tell you.
This is not a good outcome for you the client. Banks know that a client referred by an accountant is almost a captive one as accountants are the most trusted of all advisers.
We know through bitter experience that not all accountants are the same. We have referred clients to accountants but only after we test them first. We don’t receive a kick back for doing that. If we did we’d have to tell you.
On a similar note, it’s fair to say we have come full circle.
For business banking, we have a number of go-to bankers for most deals. We also have some private lenders that are happy to work with us for bankable transactions.
Some of the bankers with whom we deal are now actively referring bank clients to us whom they can’t bank. We’re happy to take them.
Now that’s a trusted adviser.