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Debt financing vs equity financing

Posted on July 8, 2020 by admin

Gathering funding is a challenge that almost all business owners face at some point. Financing can come in two forms – debt financing and equity financing.

Debt financing is money that you borrow and plan to pay back within an agreed time frame and interest rate. Common forms of debt financing include bank loans, mortgages and credit cards. This may appeal to business owners that wish to maintain complete control and ownership over their business, without having to manage the expectations of investors. Debt financing also means that business owners do not have to share any profits made by the business, as their only obligation to their lender is making payments on time. As well as this, debt financing methods are usually tax-deductible, unlike private loans.

However, debt financing also has its downsides as the cost of capital is higher. Loans from official lenders such as banks typically come with interest rates that also need to be paid in addition to regular repayments. This means that your business must generate enough income to meet the requirements of the debt, which can affect cash flow and could even result in bankruptcy if the business fails and is not able to repay the debt. As well as this, new businesses may struggle to secure a bank loan, as banks often have a strict protocol regarding who can receive a loan.

Equity financing, on the other hand, is when you invest your own money or someone else’s money (usually family and friends, venture capitalists, business angels, or public floats) in your business. As a result of this, the investor of your business partially owns your business and shares the profits you make. This method of financing may be more suitable for business owners who can accept sharing their profits and not having complete ownership and control over their business.

One advantage of equity financing is having freedom of debt as repayments do not have to be made on investments. As well as this, equity financing methods can potentially expose business owners to additional funding opportunities if investors decide to provide more support for the business as it develops. However, business owners considering equity funding should also keep in mind that these methods can often put a strain on personal relationships if the financing was sourced from family and friends, depending on if the business succeeds or fails.

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Avoiding mortgage default

Posted on August 26, 2020 by admin

As individuals struggle with cash flow through the coronavirus, the Australian Bankers Association records that repayments on almost 500,000 mortgages have been deferred for six months. While repayments can be delayed, they cannot be avoided altogether.

Lenders can send you a default notice the day your repayment is overdue. However, they could also wait until your repayment is overdue by 90 or more days. When you receive a default notice, you are given 30 days to repay the amounts you have missed in addition to the regular repayment on your loan. Individuals who are struggling with their home loan repayments can avoid mortgage default by considering the following.

Contact your lender
Lenders are generally willing to work with you through financial hardship. Don’t be afraid to contact your lender to discuss your situation and find out what options are available for you. Lenders are often willing to negotiate short-term variations to repayment schedules that both parties can agree to. However, make sure that you do not agree to unrealistic repayment conditions that cannot be met.

Many Australian banks are offering a six-month deferral on mortgage repayments (including interest) for customers who are experiencing financial hardship as a result of COVID-19. If this is you, contact your bank to see if this is an option.

Apply for a hardship variation
Mortgage holders may be able to change the terms of their loan or temporarily pause or reduce their repayments under a hardship variation. A hardship variation can still be requested after you receive a mortgage default. To apply for one, contact your lender’s “hardship officer” and tell them that you wish to change your loan repayments due to financial hardship. This will usually require you to explain why you are struggling to make payments and to estimate how long your financial problems will continue to determine how much you can afford to repay.

After submitting a hardship variation request, your lender must contact you within 21 days with the outcome of your request. They may ask you for more details regarding your request; in this case, they must contact you again within 21 days from when you provide the additional information.

Consider selling your home
Selling your home is a tough decision, but in some cases this may be the better option if your circumstances are unlikely to improve. If you get to the point where your lender takes possession of your home and sells it, it’s likely that you won’t make as much as if you sold it yourself. When you sell your house on your own terms, chances are you will get a better price and avoid having to pay the legal fees passed on by your lender. Inform your lender if you decide to sell your home; they may ask for proof, such as a copy of the contract with your real estate agent or property advertisements.

Renting out your home until you can afford to make repayments again may also be an option if you are able to live somewhere else during this period.

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