Why avoiding credit can hold back your business and your personal wealth

For many business owners in the built environment industry, taking on debt may seem like a brave thing to do. But Danny Chung, National Head of the Built Environment with Macquarie Business Banking, says that failing to borrow money or make use of credit facilities could be minimising the chances your business will ever be as successful as it could be.

So how can you use debt to stimulate growth, build a more valuable business, and improve your personal financial circumstances?

Why built environment businesses are risk verse

Chung says that consultants in the built environment industry are notoriously risk averse when it comes to taking on debt, to the point where many business owners pride themselves on owing nothing at all. While he understands the reason for this, he also says it has the potential to limit options for growth.

“On one hand the built environment industry is like other professional services industries, insofar as people pay for your knowledge and expertise,” he explains. “And yet, on the other hand, it is not like other professional services at all.”

“You know that you need to see an accountant each year for your tax. Architects and engineers don’t have that kind of certainty. To win repeat work, you need to be successfully delivering projects.”

Chung believes that this uncertainty leaves many business owners wondering whether they will be able to pay off their debt if the market turns. However, he says it is this very uncertainty that should lead them to consider using a credit facility in the first place.

“One of the reasons you would have a credit facility is for when there is a rainy day,” he says. “That way, you’ll know that you at least can manage your cashflow and meet obligations, such as salaries and tax, even when things are quiet.”

Chung points out that a credit facility can also help business owners manage their cashflow on large jobs, especially when payment cycles are stretched or where they are paid only once they hit certain milestones.

Smoothing out the bumps of a cyclical industry

Chung says that many built industry businesses tend to scale up and scale back based on the projects they’re working on. That means hiring new people when there is work and then letting them go when there is not. This often has a profound effect on morale and productivity. It can also mean you’re faced with having to dismiss talented employees who could ensure the long-term success of your business.

For this reason, Chung says that instead of constantly gearing up to employ, say, 50 people and then dropping back to employ only 30, an overdraft account could be used to smooth out your workforce so that you can keep on a consistent staff of 40.

“Otherwise, you end up having to let staff go the moment the market looks like turning. Then it can be very hard to get them back when the market picks up again.”

At the same time, he says that business debt can be used to fund expansion, allowing you to finance new offices, new staff or new marketing initiatives without the need to put your own assets on the line.

Taking a holistic view

It isn’t only your employee’s pay that an overdraft facility can help you cover, Chung says. It can also be used to smooth out an owner’s cashflow so that your salary stops being so cyclical. This includes making sure there’s still enough money to pay you - and for life to continue as normal - when your clients are taking some time to pay the invoices.

Chung also says that many business owners tend to keep their personal and business finances separate and that this can also hold them back. So, he adds that Macquarie always takes both into account when advising a business owner on the best way to use funds.

“I see business owners who’ll have hundreds of thousands of dollars sitting in their business account and a mortgage of about the same size. Generally, they would be much better off financially if they used the money to pay off their non-deductible personal debt and then leveraged against the business when they needed to, to cover the same amount.”

In fact, Chung says that business owners can borrow against the business to fund other large expenses such as the purchase of business premises, investment properties, or even to help their children get on the property ladder.

Using debt to fund the sale of a business

But it is in the sale of a business, particularly an internal sale, that debt potentially has the most use.

Typically, when owners are looking to sell internally, their successors are likely to be in their late 30s or early 40s and have all the financial commitments that usually accompanies this age bracket.

“Most people that age will have a young family and a big mortgage, so coming up with the money to buy your practice can seem like a challenge,” Chung explains. “People generally think it’s either the property, or the business but not both.”

“Macquarie can help them use debt to purchase equity in your practice in a way that means they won’t have to sell their house or jeopardise their ability to upgrade in the future.”

“This includes giving them the opportunity to borrow against their share in the business to provide you, as the seller, with an initial lump sum. They then get to repay their over a number a years.”

“This ensures you don’t need to fund the purchaser into the transition, and the new partner has skin in the game right from the start.”

“Ultimately this allows for a fair and equitable transaction between all parties.”

Drawing on the experience of other professional services industries

Chung points out that each of these practices is commonplace in other professional services, and routinely helps businesses within them grow. However, they are not yet being exploited to the same extent in the built environment.

“All businesses have an appropriate level of leverage” he says. “The key is knowing what that is and then using it intelligently to maximise growth.”

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Additional information

Unless stated otherwise, this material has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL & Australian Credit Licence 237502 ("Macquarie") for general discussion purposes only, without taking into account your personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service.