Looking at taking out a commercial lease? There is an alternative to Bank Guarantees
One of the painful aspects of moving into new premises is the requirement by many (if not all) landlords that the business put up a surety in the form of a bank guarantee equal to 3+ month’s rent. The bank is happy to provide a guarantee but it generally means the business needs to tie up the equivalent amount of money in a term deposit. This is working capital that is effectively taken out of your business for the period of the lease.
One solution is to use several insurance-based solutions, often referred to as Rental Bonds or Lease Bonds. Many of you will be familiar with a Deposit Bond when purchasing a residential property. The Lease Bond works in a very similar way.
Advantages
- Frees-up working capital
- Cost-effective
- Costs are known and paid in full upfront
- Tax deductible
Considerations
- Initial upfront payment can be an issue for all cash tight businesses (but less of an issue than taking a big chunk out for an entire lease period)
- Costs of the bonds will go up according to the size and period for which the bond is required
What to do
- Looking at a new lease? Check to see if the agreement allows for a Lease Bond – if not, see if you can negotiate this point with the landlord
- Already in a lease? If you are already in a lease with money tied up in a term deposit see if you can make the swap by talking with your landlord.
- Check / call us for more information or to see if the numbers stack up for you
Case study (Vision’s own situation) Vision rents a business on the fringe of Sydney CBD. Our lease agreement provided that we needed a bank guarantee for 5 years (the lease term) to the tune of $68,000. Vision decides to fund its business activities via an overdraft. We took option 2 |
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Option 1 – bank guarantee
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Option 2 – lease bond
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Mortgage Broker Regulation…. What does it mean and where does Vision sit?
The media and government has given more coverage to our industry than ever before. Firstly, it was the sub-prime lending issues and then regulation of our industry. We have seen headlines like ‘States Under Fire Over Mortgages’ and ‘Brokers Slip Through Legal Loopholes’. We feel it would be helpful to clarify what is happening and where Vision sits.
Federal Government inquiry
There have been substantial changes to the practices in, and the structure of, the housing lending market over the past decade. At the same time there has been continued growth in Australian households’ debt levels.
These developments have concerned some groups and commentators, who argue that credit is too easily available and that many Australians are overcommitted and facing financial hardship. Others are less concerned and maintain that the new lending practices are generally sound and that the increasing debt burden is more than manageable for most.
The House of Representatives Standing Committee on Economics Finance and Public Administration deemed it appropriate to examine some of the issues surrounding housing lending, given its fundamental importance to the Australian community and economy.
This has led to a report on ‘Home Loan Lending’ after an ‘Inquiry into home loan lending practices and processes used to deal with people in financial hardship’.
Existing regulation of mortgage brokers
A key recommendation in the Parliamentary Report is that the Commonwealth Government regulates credit products and advice. This includes the regulation of mortgage brokers and non-bank lenders.
There is currently no national regulation for brokers. The main reason for this is that loans and credit products are currently not classed as ‘finance products’ under the Corporations Law. Credit products are currently regulated under different state-based legislation called the Uniform Consumer Credit Code.
Most established, reputable brokers want to see national regulation for our industry. Our main industry body is called the Mortgage and Finance Association of Australia (MFAA). This body has been lobbying (on behalf of us) for national regulation for a number of years. This effort to get uniform regulation for lenders and mortgage brokers, and other relevant parties has required all the states to agree to one set of rules.
With respect to all parties involved, this has not been an easy process.
What you should know about Vision
- Peak body - we are full members of our peak industry body
- Behaviour - we are required to adhere to a stringent Code of Practice in order to maintain our membership
- Our brokers - all our brokers hold accreditation with our peak industry body
- Complaints - you can find our complaints process on this website
- Disputes - We are full members of an external dispute resolution scheme –the Credit Ombudsman Service
- PI - We hold full professional indemnity insurance
- Long term commitment – we hope that our commitment to professional staff and investment in infrastructure such as office premises is a strong indicator that we take a long term view of working with you
Want to know more?
- Visit our industry body – www.mfaa.com.au
- Visit our dispute resolution scheme – www.creditombudsman.com.au
- View full parliamentary report - www.aph.gov.au/house/committee/efpa/index.htm
David Lennox
Vision – Group Partner
