In times of crisis, we all want to know how to protect our business and personal finances.
Most people in the finance industry have seen it all. Recessions, bull markets, Royal Commissions and all manner of other financial ups and downs. But a global pandemic was not one of them.
Many people didn’t realise that businesses had the option to ‘stand down’ employees. There’s never been a time when entire industries simply had to shut their doors. Swathes of people are out of work. And the global economy is suffering to an extent, and in a way we’ve never seen before. What happens in the future to our businesses, our jobs, our homes and our finances, will be uncharted territory as well.
However, we have also learned tactics from crises of the past that can help guide us through the current pandemic. Here are some tips that can help protect your business and personal finances during a crisis.
Almost everyone’s personal financial position will have changed during the pandemic. Even if your business is still up and running, it’s likely your customers or clients will have been affected, which then has a knock on effect. And with so many little luxuries unavailable (bars, pubs and cinemas) and everyday expenses suddenly becoming unnecessary (petrol and transportation costs), there has never been a better time to focus on cutting back on spending. It can help both your business and personal finances.
If you are in a position to start or increase your savings, it’s a great time to do it. Hopefully things will start to look up soon, but if not, you’ll be better prepared.
Start by updating your household budget to see where you can cut back and start saving. Then allocate 50% of the savings into either a 100% offset account or direct it into a home loan which can then be used as redraw. This will make the most of your savings and help future proof your financial position.
You should focus on eventually having a savings equal to the cost of your household budget for three months. Again, this should be held in a separate savings account, 100% offset account or loan redraw.
Many businesses are also offering support options such as waiving late payment fees, offering extra services at no extra charge (or a reduced charge) and suspending disconnection and credit collection activities, among others. A simple phone call can help you access these services.
It’s easy to get swept up in the need to protect your home and loved ones by guarding against any shortages in the future. In situations where we can’t control much, we look to control what we can. Panic buying can be the result of that. However, panic buying can wreak havoc on your finances.
Not only will you have a greater outlay than you normally would, but panic buyers purchase indiscriminately based on availability rather than preference or price. That means you will likely be paying more for things you don’t necessarily want or need. In a time of possible recession, it’s better to buy what you need, when you need it at a price that suits your budget.
Banks have responded to the pandemic by cutting interest rates on small business loans by as much as 100 basis points. They are also reducing interest rates on one, two and three year fixed rate mortgage loans to as low as 2.14%. You should consider whether any funding that you currently have, or currently need, can and should be accessed at these reduced rates.
Review your existing business loans and consider transferring any ‘redraw’ components to an offset account or a separate savings account (without direct debit access). This will provide an easy access buffer which can be used as required. This will also help you be prepared for any changes in the availability of funding in the future.
In your business planning, implement a strategy to respond to future ‘shocks’. Progressively save towards having a buffer in the amount of three months of fixed costs. Where possible business owners should also include an interest only loan split or a line of credit in their residential and commercial funding. These products are not widely available, but are still obtainable. They’ll provide you with a backup in the future, should you ever find yourself in need.
I wrote previously about how now is a good time to consider your cashflow position. If you believe you are going to need additional working capital financing, it’s a good idea to get that into position as soon as possible, so that you’ll be in a much stronger position going forward.
In the same article, I broke down much of the government stimulus packages that are available to small business owners. If you haven’t already reviewed your options, take a look and see what might be available to you. Since then, the government has expanded the JobKeeper scheme which can assist both businesses’ with employees and sole traders (among others) if certain eligibility requirements are met.
Lenders are offering financial relief from business and home loans in the forms of pauses on repayments and loan deferrals. However, it’s essential that you carefully consider whether this relief is right for you. Interest will keep accruing, and when you start to make repayments again, you’ll need to increase your repayments over the remaining loan term.
It’s worth considering if pauses, or delays or even decreases on repayments are really in your best interest and in the best interest of your long-term financial position. If you’re unsure what will be best for your situation, give your financial specialist a call. We’ve prepared a ‘what-if’ tool that can help you analyse the implications of a repayment pause for you.
What happens in the future to our businesses, our jobs, our homes and our finances, will be uncharted territory. But examining our financial position will help us make changes that can put us on a better foot going forward.
These are challenging times, there’s simply no denying it. And many small business owners are going to struggle. But if we can make decisions that keep our long-term financial position in mind, we may just come out ahead.
If you’d like to discuss your business and personal finances or how to access financial funding, get in touch. We can help.
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