A Wonderful Problem!

Hi All,

Recently I arranged a LOC for potential opportunities that might arise this year.

Figures as follows:

Market value of house - $445k
Loan - $157k (with redraw facility of $70k)
LOC Limit - $130k

So the LVR on our PPOR is now 80% with the LOC and no drawings on teh LOC at the moment.

On Friday, my boss invited me to buy a % in the business he has, which would cost around $200k. It's a good business, cashflow doing well but my concern is that I am now at 80% LVR and the LOC is for investment purposes, not business purposes (this business offer came out of the blue!).

Whilst I appreciate this is a property forum, are there any members who were in a situation whereby they were trying to obtain business finance after having investment finance in place and what options I should potentially be exploring.

(e.g. look at increasing LVR to 90%, pay mortgage insurance and use increased funding, under some sort of business facility, for a deposit on business and then apply for separate business finance).

Many thanks for any thoughts!

Zargor
 
Hi Zargor

Those are VERY good questions

As soon as you mention "business" to a bank........prepare to be done over on both LVR and rate.

Non PPOR loan is for business and/or investment purposes IE not regulated by the UCCC,so u are safe as far as the bank goes

You are buying SHARES .............right !

Who is the lender ?

ta
rolf
 
Hi Rolf,

Lender is CBA and I have a Viridian LOC with them.

The business will actually be a partnership of trusts (i.e. not shares in a company) for commercial purposes so I will be buying a share of the goodwill mainly as there is no stock, significant P & E (i.e. it is a service business).

Sorry, could you just clarify what do you mean when you say I am safe as far as the bank goes with the non-PPOR loan?

Many thanks

Zargor
 
As far as I know onceyour LOC etc is approved you can draw it down and spend it on what you like. You do not need permission every time you write a chq or whatever against it.

You do not need to go to the bank and say .."hey I now want to use the LOC to buy shares in an unlisted small business" this would be suicide; the LOC would be pulled and good luck getting it back in place for IP's in the future.

This business is as Rolf said, buying shares, it is an investment in itself and the interest should be just as deductable as using the money for an IP.

If it is a good buy and cash flow positive and you think it is a good investment then go for it.

It's your choice acashflow negative IP where you are relying on capital growth for an investment return or investing in this business... your call.

Just beware of the higer level of diversification risk .. your income and your investment come from the same soure... no diversification.

cheers

RightValue
 
Thanks Guys,

The purpose of the LOC can be for " housing, personal, housing investment or personal investment purposes (excluding business purposes)".

However, as I see it, there is an argument that "business purposes" could mean simply funding instead of a business overdraft or debtor financing (i.e. making the distinction between funding that an existing business may require as opposed to for an actual investment in a business. Also, given that the LOC would be used to merely fund a deposit and the majority of the business funding would be via a separate busines facility, I would have thought I have reasonable arguments. Especially given the LOC is secured over the PPOR and if the bank ever argued, after the event, that the LOC could not be used to fund a deposit, then why does the bank allow an LOC for "personal" purposes?? (e.g. funding for your personal gambling addiction). I would have thought that's a riskier avenue.

Let me know if you think I have strong arguments.

Many thanks

Zargor
 
Really, what are you going to do, go in to CBA and ask them if its ok if you use the money in the loc to buy into the business or are you just gauging opinion?

You head into biz finance and even if resi secured, banks dont like LMI being involved.

You'd really want to check the sale agreements/exit clauses etc

I'd be wondering why hes looking to sell it or a portion of it though. Is it sucession planing?
 
Could you go back to your boss and offer say $150k now and $70k in a year's time.

In other words stick to the 80% lvr?
 
If my boss came to me and offered me a share of the business, I would start looking on Seek.com. Just me, but if he cant get bank finance or another investor to buy in, why is he approaching you? at the very least, I would want full financials, and an independant assessment from a business broker or someone with similar experience in that industry. It may be to you it seems like a good cashflow business, but perhaps the industry norm is for excellent cashflow businesses, or perhaps normally that industries businesses are funded to a diferent model? etc etc.
 
What would this investment if it is not 'personal investment purposes'. It is not for business purpose as you are not using the loan to run the business.

Ones you were operating a business and then wanted to use the LOC to finance the running of the business then I interpret that this is what you are not allowed to do.

As already suggested have you reviewed the financials normally as an employee you will not be aware of all the ins and outs. You need to determine at what multiple you are purchasing your units. Also with units what stops your boss selling more units to others ie how fixed is your investment.

I am not suggesting that this is not a good idea but please approach with care and eyes wide open.

Cheers
 
Thanks everyone for your comments.

The business is sound (27% net after commercial salaries), has infrastructure in place and the reason I have been offerred to buy-in is because I have helped build it up. I am being offerred a discount to market value (which I have independently had undertaken).

Part of the reason is succession-planning and the customers know me well.

I'll give some more thought to all your comments but really appreciate them.

Zargor
 
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