An insolvency specialist is warning business owners to be alert to the risks associated with falling property prices, given the family home is often used as security for business finance.
Trent Devine, a partner at Jirsch Sutherland, suggested that the huge boom in values – particularly on Australia’s east coast – has helped many businesses stay afloat by dipping into equity. But this strategy may now come back to bite them, amid a backdrop of falling property prices and banks hiking interest rates.
“Any business that has used personal finances for business borrowings is at risk,” said Mr Devine.
“In the past, when times were tough, struggling businesses have been able to lean on the equity of their home. Now, with falling house prices and other factors, this can have a disastrous knock-on effect for businesses.
“As property prices continue to fall, there is reduced levels of equity with which to finance or prop up a business.”
According to Mr Devine, a key risk for business insolvency is an “ill-advised link” between personal and business finances. Yet this is often unavoidable for new businesses.
“SMBs often use the same bank for the business that they use for personal banking, therefore they’re likely cross-collateralised,” he said.
“They may have their mortgage and business loan with the same bank. They don’t separate one from the other.”
This situation makes it much easier for the bank to assess the health of the business owner’s finances and make much earlier decisions on whether to push for insolvency.
“Rises in interest rates and resulting mortgage stress can certainly flow onto businesses as we’ve witnessed over the past 12 months. If a business is struggling, banks might now note that there’s now no property to support that business because the mortgage is under stress. Clearly, this means that business insolvency becomes a strong possibility,” said Mr Devine.
He urged business leaders to protect themselves by separating business and personal finances.
“Use different banks for business and personal uses so that cross-collateralisation is not an issue. If you are utilising personal funds, perhaps a secured loan to the business rather than opting for a capital injection might also be an option,” he advised.
“Also, business owners who are looking to refinance to help fund their business’ cash flow might find this difficult because of falling house prices.
“When first setting up a business, money can be incredibly tight, but it’s important for business owners to take the time and speak to their accountant or adviser to get the most appropriate advice. Options do exist and it’s important to explore them or risk losing everything.”
Mr Devine’s comments come after property data firm CoreLogic suggested banks are only exacerbating the housing downturn by raising home loan rates, meaning the current lull in most mainland capital cities will linger for longer.
Latest figures from the firm show that prices have fallen by 5.9 per cent in Sydney over the last 12 months, and by 2.5 per cent in both Melbourne and Perth. Melbourne has also overtaken Sydney as the city with the fastest falling home values, down by 3.8 per cent so far in 2018, compared with Sydney’s 2.7 per cent slump.
Hobart is currently the nation's star performing market, posting double-digit price growth over the past year.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.