Understanding your Finance Arrangements

In the world of finance, banks often employ a strategy known as “linking securities” to mitigate risk and maximise returns. However, this practice can also have unintended consequences, making financing more challenging for both individuals and businesses.

Financial institutions have been employing the strategy of multiple products for years now. It means having a customer link their residential securities, commercial securities, and businesses together for the bank’s benefit. Having them “linked” means lenders have a higher value of collateral in the event of disaster. It stops the customer from leveraging with other banks when your main bank reaches its lending capacity. Ultimately banks believe, having more than 2 to 3 products with one customer makes it harder for you to move & therefore they can start to increase your rates without fear of you moving banks for a lower rate.

When borrowing money, banks consider 2 main criteria:
1) The servicing capacity to repay the debt. That is – does your income cover your expenses plus loan repayments.
2) The security they hold for the debt. That is, what can the bank liquidate to get their money back, should you not be able to repay your loans.

The types of security for a traditional Health Customer would be:
1) Residential Security (Owner Occupied or Investment property) secured with a 1^st mortgage.
2) Commercial Property (secured with a 1^st Mortgage)
3) General Security Agreement – security over a business
4) Publicly Listed Shares on a margin loan.

We regularly see customers with 2 – 3 houses and a business all linked together to provide some home lending and a business loan. They are seeking money to renovate a practice or a house and require $300,000 – $400,000. A significant amount that requires security, which is currently used by their primary bank. Ideally that customer would have established loans that purely used the security that the loans were intended for. However, given they are linked they have a choice of returning to the current lender or seeking a refinance of all the loans to separate the securities. If they had setup the lending separately from the outset, it would mean easily dealing with one security and looking at the best structure & rates available from multiple lenders, thereby getting themselves the best deal possible.

An example to consider;

Imagine a scenario where Dr. Johnson, a dentist, decides to purchase a new dental chair and X-ray machine for her practice. She secures financing from Bank A to cover the equipment costs, unaware of the fine print in the loan agreement. Unbeknownst to Dr. Johnson, Bank A sneakily includes a clause that allows them to take security over all of her practice’s assets (a general security agreement), not just the equipment being financed.

Fast forward a few years, and Dr. Johnson decides to expand her practice further by leasing a larger office space. She approaches Bank B for a commercial real estate loan, confident in her practice’s success and financial stability. However, to her dismay, Bank B discovers that her existing equipment financing with Bank A includes cross-collateralization, meaning all of her practice’s assets are tied up as security. Despite her excellent credit and healthy cash flow, Dr. Johnson’s ability to secure the loan from Bank B is compromised due to this unexpected clause.

This example underscores the importance of thoroughly reviewing loan agreements and understanding the implications of cross-collateralization. Without careful attention to the terms and conditions, Dr. Johnson can find herself inadvertently limiting their future financing options. We pride ourselves on making sure our clients are offered the best interest rates, conditions in terms of securities and structuring of finance to suit their needs not just now but for future borrowings.

If you or any of your friends, family or colleagues would like an obligation-free discussion about your loan structure and options available, please feel free to reach out to Jason Savage at JS Medical & Dental Finance via info@jsmdf.com.au or 1300 829 134.