The struggle for sourcing business finance is only getting harder with the share market doing its best impression of a rollercoaster and now the full extent of the European Sovereign Debt problem really starting to surface. Quite simply there is an overwhelming sentiment of hesitation and avoidance of risk, so when it comes to lending money, this has had a knock-on effect right through to businesses in Australia.
Bizarrely enough these businesses are not investment banks and they have no links to the property or share markets that some say caused or at least exacerbated the credit crisis. In most cases they are running at a tidy profit and have no presence in the overseas markets where the financial dramas are playing out.
This is a situation we have come across more and more often in the last few years. Often a new client will be referred to us by their accountant because they are finding it difficult to not only obtain business finance at a reasonable rate but in some cases the amount being approved is far below what they need and have been offered in the past.
So what is a Novated Lease?
For those of you who don’t know, a Novated Lease is where an employee takes out a finance lease on a vehicle in their own name and then enters into an arrangement with their employer to have the repayments deducted before tax from their pay. When done properly with an employee’s personal car, the result is a significant tax benefit worth thousands of dollars every year, together with added convenience for running the car and paying for those expenses as well.
However it is in situations where an employer is able to convert existing company car arrangements into a Novated Lease Program where things start to get interesting. Naturally, we are there to help co-ordinate the change and make sure everybody is at ease throughout the process.
A case study
We often comment that a Novated Lease Program is kind of like a Swiss Army Knife, as it is just one tool but it can be used in so many different ways and here’s a good example.
We were approached by a reputable accounting firm who had previously worked with us and they asked if we could assist with one of their clients who had grown at a rate that was simply too fast for their current funding arrangements to support. They had a number of company cars which had been provided to staff, in particular salespeople. The problem was twofold:
- They needed to recruit more salespeople which meant buying more cars; and
- They had a great opportunity to capitalise on the mining boom which required them to open another office close to their growing new clients.
Unfortunately they had entrusted all their funding arrangements to traditional bank business lending with directors’ personal guarantees. So when the time came to enter this next phase of expansion for their already very profitable business, the bank simply said no.
From all accounts it appeared that the bank showed little vision and perspective on the facts of the situation. The bank’s decision was based more on reaching some arbitrary limit or conforming to a required ratio rather than focusing on the profitability of their business to date and the viability of their proposed expansion plan.
After an initial discussion with management at the company and their accounting firm, it became obvious to us that this was an all too typical scenario being faced by Australian businesses today. Thankfully that meant that our solution was tried and tested, so we set to work.
We identified two key requirements to meet the company’s needs:
- A scalable funding model for growing their sales force without involving further debt which was personally guaranteed by the directors.
- By valuing their fleet of company cars we found that they had significant funds tied up in their fleet, which equated to much more than they required for their new interstate expansion.
Finally, the company was able to get confirmation from their bank that if they released the funds from their fleet then the bank would allow them to reallocate these funds to their expansion plans.
The rubber hits the road
Change is not an easy thing to introduce and by our very nature, human beings will usually oppose it. More often than not, this reluctance is purely the result of fearing the unknown and so after first familiarising ourselves with the client’s specific circumstances we then set about educating their staff on what is happening and how it will affect them personally.
The last thing you want is to engage a provider who doesn’t have the experience and knowledge necessary to handle this delicate process properly.
Working out what you need
First of all we review the makeup of a business’ current fleet and what each car is costing versus what is actually required to fulfil that business function. It is not uncommon to find that there is a distinct culture surrounding the cars that people drive at a workplace and so this must be given an appropriate degree of consideration when setting up a Novated Lease Program.
We then translate these costings into a suitable car allowance for each role in the business, so that employees are sufficiently compensated for paying for the car out of their salary package without significantly increasing the overall costs to the business.
It is important to be aware of potential concerns regarding job security and to take steps to guard against these situations with tools such as redundancy insurance which mean the employee is protected and remains confident in their role.
Once the details of the Novated Lease Program are finalised, we then proceed to roll out the information to a business’ staff. First we run group presentations to launch the general details that apply to everybody and to make sure that people who have not had a company car in the past realise that they are now eligible to get a Novated Lease as well. Unfortunately there are a lot of misconceptions about Novated Leases and so we spend some time reinforcing that a Novated Lease truly can benefit employees in a variety of situations:
- For all levels of income
- Even if you don’t use your car much
- Even if you don’t have any business use
- Even if you catch the train to work
- Even if you want a used car
- Even if you want to keep your current car
- Even if it’s a car for your spouse or children.
This is then followed up by individual sessions with each employee to go through the affect a Novated Lease will have on their own personal situation including full payroll calculations. During this time we take the opportunity to highlight some of the many benefits that the Novated Lease Program is providing for them, including the flexibility to:
- Get a less expensive car that still meets your needs and pocket the cash difference;
- Select the car that you really want, not just one from a limited list of options; or
- Finally drive your dream car by contributing a more on top of your car allowance.
The end result
Fast forward two years and this client has now more than doubled in size, not just in terms of revenue but more importantly, profit. They have successfully implemented a scalable solution for providing vehicles to additional salespeople who have been the driving force behind the phenomenal growth of the company. In addition to establishing the new interstate office, they have already opened a further two offices with plans to open even more in the near future.
–Rod Wilson is managing director of Prosperion, specialists in fleet and novated leasing.