Financing your own Real Estate Agency – By Nick Dowling, Macquarie Bank
Thinking of starting up your own real estate business? Here are some tips for getting a business loan.
Financing growth in the early stages of any business can be a challenge. Most likely you will need to contribute an amount of personal capital and, if borrowing is required, security is generally needed in order for a bank to lend money. The decisions you then make in formulating and executing your business can impact your ability to borrow money to grow your business down the track.
For start-ups and real estate businesses in their early stages, it is important to have a clear picture of how you plan to grow your business, including what role you envisage property management will play.
Banks usually treat rent rolls and residential and commercial properties as security. Some banks will look at the rent roll only. Despite the fact that the sales component of your business might initially generate the majority of your revenue, it’s rare for banks to lend against this stream of income as it’s generally less predictable and more susceptible to downturns than property management.
However, that doesn’t mean the bank isn’t interested in your ability to attract and make sales. Banks want to feel comfortable with the debt serviceability of their borrowers and in most real estate businesses a sizeable proportion of monthly net income comes from sales. Finding the right balance between sales and property management is important for your own peace of mind and will help make the business more attractive to a potential lender.
Once you are in a position to demonstrate sufficient serviceability and security, the steps you need to take when thinking about borrowing for the first time are:
1. Think about going into business with your bank
It’s useful to keep in mind that when asking a bank to lend you money, you are effectively asking the bank to go into business with you. Just like you, your bank is looking to make a return on their investment so it’s important that you can give them confidence in your business strategy and plan. A good strategy is not simply a good idea; it is a sound strategic and financial proposition.
2. Run the numbers, then write your business strategy
When putting together your business strategy it’s often tempting to focus on writing the strategy first. Instead, it can be a good idea to start with the numbers as they will tell your story best.
Your bank will want to see the actual and projected financials broken down on a month-by-month basis in detail about your financial position. Your bank will also be keen to see how you articulate your business strategy and to see a comprehensive plan of how you will execute your strategy throughout the next six to 12 months, and then over the next three and five years. Be prepared to highlight and discuss the risks involved. This shows you have an appreciation of what is involved.
3. Work with trusted advisers
It’s important that you work with good advisers who can help you define your business strategy and articulate your financial position.
You will need to work closely with your accountant in order to be able to present the type of financial information your bank will expect to see. Your accountant will be able to advise you on a suitable corporate structure and the right accounting software. Both will be essential investments for your future.
4. Understand your fixed cost coverage
From a financial perspective, probably the single most important area for you to understand is your business’s fixed costs. Basically this is all costs incurred excluding salespersons’ commissions. Work out what your fixed costs will be on a monthly basis and compare this to your expected income this gives you a feel for the level of coverage. Beyond this you’ll also need to understand how any future loan repayments will impact your cash flow and your break-even point.
5. Find out what the lender can offer you
Your bank should be a wealth of information not just a debt provider. You should ask the lender what kind of help they can provide beyond the loan facility itself. This may include information, tools or advice.
A bank that really understands the business you are in will be able to share information and tools with you that will help you to better manage and grow your business.
You should ask your lender how the relationship will work and if they will play a role in helping to advise your business. Look for a bank or lender who specialises in your industry, as understanding the nuances of the real estate industry can be important to the success of your loan application. Ongoing, they’ll also be in a better position to provide you with relevant industry insight to help manage your business more effectively, including providing industry specific products and services.
6. Understand what kind of loan facility works best for you
A Bank Bill Facility often requires interest to be paid up front, so an important consideration for first-time borrowers will be whether you should use a Bank Bill Facility or a Fully Drawn Advance (interest is paid in arrears). You should also ask your bank if your loan repayments will be principal and interest, or interest only. Another important consideration will be whether you decide to fix your interest payments or stay variable.
7. Seek feedback from your lender
It’s important to seek feedback from your lender. There may be steps that you can take that would help strengthen your business to meet lending requirements.
In summary, when starting out with a new real estate business, the focus is often on sales and building your brand in order to keep the business afloat day to day. But it is also necessary to give consideration to your longer-term growth strategy and the role property management plays. Ultimately the objective is to be in a position to demonstrate not only your experience in the industry, but also a strategic business plan while finding the right balance between sales and property management. These factors will be essential to establishing a successful relationship with the right bank.
Nick Dowling is the National Head of Real Estate with Macquarie Relationship Banking. He specialises in business banking solutions for residential and commercial real estate businesses. For more information, email email@example.com or visit the website at http://www.macquarie.com.au/mgl/au/business/industry/real-estate