Welcome to the world of business finance. Full of tempting offers and lots of promises, applying for business finance seems to be exactly what every self-respecting business should do. But is it? In this beginner’s guide to business finance, we look into your options for it, what you need to have in order to apply for it and how it could be used to benefit your business.

Understanding Your Business Finance Options

Like with most things, when it comes to finance for a business, one size does not fit all. Consequently, there are many different options available:

  • Term loans
  • Overdrafts
  • Peer to peer lending
  • Line of credit
  • Grants
  • Pre-sales
  • Angel investors
  • Business incubators and accelerators
  • Crowdfunding
  • Friends and family
  • Venture capital

The type of business finance you choose does matter significantly, which is why taking your time to chat with a business advisor makes good financial sense. We’re here to help: book a time now.

How to Get Business Finance

Just like when applying for a residential mortgage, you need to be fully prepared, although in a slightly different way. While there will be specific criteria for each finance option, in general you will need to have organised your:

  • Business plan – what is the opportunity you are needing cash for? How will you take advantage of it, and what exactly will each dollar be spent on? What are the risks and how will you manage them?
  • Finances – you’ll need a budget which demonstrates how you will meet and make finance repayments, details of past and future cashflow and two years of profit and loss statements.
  • Security – if required, what security can you offer the financer to mitigate the risk of lending to you?

Once you’ve put your application together, it’s time to approach the financer. Remember, they’re not wanting the wow factor, but rather how you will meet repayments.

Beneficial Ways to Use Business Financing

Like with any type of repayable financing, it’s important to note that it does involve going into debt. Because of this, you’ll want to make the right decisions as to what you will use it for. Some examples of financially smart ways to use it include:

  • Purchasing new equipment which will allow you to produce your product or service faster and more cost effectively
  • Debt consolidation – rather than paying lots of little loans, refinancing into one with a lower interest rate will save you cash
  • Marketing – paying for an advertising campaign to bring in new clients or customers to boost your cashflow
  • Purchasing inventory – especially for seasonal businesses, using financing to purchase new inventory for the upcoming months can make sense

Before you jump headfirst into obtaining any business finance, give us a call. We can help you decide if this really is the best option for you, and help you create a workable plan to obtain and repay it.

How will you get the money out of your business when it’s time for you to move on? A business exit strategy will give you the knowledge in advance of how you will wrap up your involvement in your business. It can also help increase the amount of money you will be able to recoup too.

No one has a crystal ball and we can’t see what the future will hold. There are many reasons why you may need to leave your business, including health, family, a need for money, a change in interests and retirement.

Developing an exit strategy includes the creation of a detailed plan which identifies the steps to be done for you to leave your business. To identify the most suitable exit strategies for your business, an assessment of both you and your business should be done, along with a review of the implications the strategies would have.  This then provides you with a documented plan which states what the options are, the pros and cons of each and the amount of cash you could expect with each option.

Regardless of the length of time your business has been operating, the creation of a business exit strategy is a must. In this article, we will explain the benefits of having a strategy, what your options are and how to develop an appropriate strategy for your business.

What Are the Benefits of Having a Business Exit Strategy?

The benefits of having a strategy in place to exit your business include:

  • You can mould your business into the best shape for your chosen exit option. This will give you the best possible value from it.
  • It allows you to groom successors from within the business to make the transition flow smoothly for everyone.
  • You can leave the business at a time which suits you and when the market conditions are advantageous.
  • A protection plan for your financial assets will be in place.
  • The value of your business remains protected and buyers see this as a positive feature.
  • Informing strategic decision making by keeping the end goal in site.

You’ve worked hard to build your business, so why not do everything you can to protect your investment? Next, we’ll look at some exit strategy options you can choose from.

What Are My Business Exit Strategy Options?

To develop the most appropriate exit strategy for your business, you need to lay all of your options on the table first. To maximise the value of your business, your chosen strategy must be flexible and appropriate to meet your needs and requirements. Your options include:

  • Liquidation – basically this is the closing of your business and selling all of its assets. For many small businesses, this is often the only option. The advantages are that it can be done quickly and easily, with the biggest disadvantage being that you’ll receive only a low return on investment.
  • Merger or Acquisition – your business is purchased by a larger company who then merges it into their operations. Advantages are that it is highly beneficial for the purchasing company, and that you are likely to receive a fair sale price.
  • Initial Public Offering – this is when you sell your shares in the business to the general public. It requires a lot of pre-work to get this up and running.
  • Passing to Family Members – your business is kept in the family, and you are able to groom your family successor. You also may still retain a say in what happens with the business too. However, it’s easy for families to fight over the ownership and management of the business, and they may not even want it.
  • Selling to Employees – you may have a manager or a group of employees who would like to purchase your business.
  • Selling to an outside buyer – you could advertise and sell your business to someone who is not currently connected to it.

This then leads to the question; what should you do next?

Creating Your Business Exit Strategy

We recommend having a chat with us before you develop your exit strategy. Not only can we assist with a valuation of your business, but we can also help you identify the key data you need to collect to make the best possible decision.

This can include collecting information about:

  • Appearance of premises
  • Condition of assets including machinery and software
  • Accounting systems are current and appropriate
  • Customer files are up to date and easily accessible
  • Policies and procedures are documented
  • Employees are fully trained and efficient

You will also need to consider:

  • Who your target buyer is and where you will find them
  • How long you are prepared to allow the leaving process to be when it’s time for you to get out
  • You have at least two years of financial records available to share with the purchaser. You should also be prepared to answer questions regarding your expenses, revenue and historical cashflow.
  • That your business can run without you being there. This may mean training up employees and stepping back from your role, as well as having regularly reviewed written processes for employees to follow. Aim to step back at least several months before the planned exit
  • The value of your business as it stands, and what improvements you could make which would increase its value
  • How you will promote your business to buyers, also known as your sales pitch
  • What your family’s wishes are, if you are considering creating a succession plan for them to take over the business
  • Goals for your business in the future, including what your role will be and when you want to leave the business. Do you want to remain a stakeholder and continue to have a say in how the business will run? Or is a great financial exit more appropriate for you?
  • When is the optimal time to leave your business? This can include data regarding the historic revenue of your business, periods of growth and busy times of the year.
  • That your website is updated, easily modifiable and you can arrange training for the new owner.
  • All debts must be paid in full and any existing personal finances removed from the business.
  • All outstanding invoices are paid in full.
  • Non-core assets are sold off and the business is streamlined.

As business advisors and accountants, we can help with the creation and documentation of your exit strategy. We’re only too happy to help; get in touch with us today.

You’ve started or are about to start up a business; it’s time to discuss business structures. Sure, it doesn’t sound like the most interesting of topics, but it’s one that can have a significant financial impact upon your future.

Every business in New Zealand must have a chosen structure. The structure of a business affects the way in which it works, how it is treated by the government and what laws apply to it. As a business owner, it is your decision as to which type of structure you choose. Your decision will impact upon the amount and type of administration you must do, the amount of tax you pay, your business’ legal status and if you can sell shares belonging to your business. If you don’t state a business structure, you will by default be classed as a sole trader. The best advice we can give, is before you choose, make sure you understand the ins and outs of each structure type. We’re giving you a short run down today, but for personalised advice, come and see us.

In NZ, there are three main types of business structures:

  • Sole trader
  • Limited company
  • Partnership

Other less common business structures in New Zealand are:

  • Unlimited companies
  • Co-operative companies
  • Trusts
  • Charitable trusts
  • Incorporated societies
  • Limited partnerships
  • Industrial and provident societies
  • Friendly societies
  • Building societies
  • Credit unions

Each of these structures has different legal and financial obligations. In this article, we’ll stick to explaining more about the three common structures, plus how to choose the right structure type for your business.

Exploring NZ’s Top Three Business Structures

While we work with all types of business structures, these are the three we most commonly deal with:  sole trader, limited company and partnerships.

Sole Trader

Sole traders are people who start or own a business on their own, without registering it as a company. It is the easiest and cheapest type of structure for a business. With no legal fees, complete control of your business and the ability to offset losses against other bits of your income, there are plenty of pros. On the other hand, the cons are that it can be a hard business type to grow, sell or gets loans for, and you are liable for all debts.

You can hire employees to help you run your business but will need to register as an employer with IRD first. You will need to pay tax on all your income but can claim on expenses for things needed to run your business.

To become a sole trader, you need your own IRD number, any required licenses or permits for your business industry, and any qualifications to work in your industry. Like all businesses, you’ll be expected to keep accurate financial records and if you earn more than $60K per year, you will need to register for GST.

Limited Company

If you are an NZ resident, you can set up a limited company. A company gives you legal protection that being a sole trader does not. As a company, it is separate from you personally, but that doesn’t mean you aren’t liable for its debts.

You can have both shareholders and directors in a company but must file annual returns with the IRD and Companies office. You need to let the Companies Office know who your directors and shareholders are, and when paying tax, a shareholder and a company have different rules to follow.

The pros of choosing a company structure are that you’ll have more standing in the business community, it will be easier to sell, grow and obtain loans for, plus there is a lower tax rate for a company than the top personal tax rate. The cons are that there are more regulations to follow and responsibilities to comply with.

You pay tax based on your company’s profits and can distribute profits to shareholders. You can also hire employees but will need to register with the IRD as an employer.

To start up a company, you will need to reserve your company name, choose directors, register for tax as a company, and issue shares. There’s a complex list of tasks needed, and we suggest reading the information on the New Zealand Companies Office website initially. It is also a decision best made with professional business advice, of which we can offer you.

Partnership

A partnership structure is when two or more people or organisations start a business. There is a clear agreement as to who pays for what, who receives what and who will do the work. It is generally used by professionals, such as lawyers or doctors.

The pros of choosing to use a partnership are that it is not just you running the business, and each partner can focus on doing what they do best. You can share the costs for the business, and partners can bring in some much-needed money. However, in a partnership, you are all liable for any of the debts the partnership has or will have, including those of your business partner.

It is possible to hire employees, and once again you’ll need to tell the IRD that you are an employer. When it comes to paying tax, the partnership doesn’t pay tax. As the income is shared between all the partners, it is the responsibility of each partner to pay their tax instead.

How to Choose the Right Business Structure

Like we’ve mentioned above, when making the decision as to which business structure to move forward with, get professional advice first. While there’s nothing wrong with simply picking to be a sole trader upfront, and indeed lots do, if you want to change to a company at a later stage, you’ve got extra complications ahead of you. Our business development services can help you clarify right from the start where you want and should be, and there’s nothing better than getting things right from the word go.

To take the DIY route, as well as learning about the different business structures, there is a handy online tool which can help you decide. Found on the Ministry of Business, Innovation and Employment website, there is a quick questionnaire which asks you three questions. From your answers, it gives you what it believes is the most appropriate structure for your business.

There are some questions that you should ask yourself anyway, and should you be meeting with us, we’d ask you these (and more) too:

  • How many business owners will there be?
  • Do you want investors in the future?
  • Will you want to sell the business in the future?
  • Will there be any large loans, debts or costs in the future?
  • How much ‘protection’ or ‘space’ do you want between your business and your personal assets?

Let’s meet up for a coffee and chat about your plans and ideas for your business. We’d love to learn more and help you make the right business structure choices from the word go. Get in touch with our business advisors today!

What you can and can’t claim as an expense when buying a rental property is a hot topic of conversation. The confusion around this issue is likely inflamed by the recent changes to the rules that the IRD has quietly made without much publicity.

Below are some of the most common questions we get asked with property purchases. If your question isn’t below, get in touch with our team of property tax pros and we can help get you sorted.

Can I Claim for Legal Fees When Buying a Rental Property?

Yes. The IRD has recently accepted that their previous opinion on these fees was incorrect. You are now permitted a deduction for legal fees related to the purchase of a rental property, up tot he standard maximum of $10,000.00 in any tax year.

You can also claim for fees related to taking legal action to recover unpaid rent.

You can only claim the legal fees for selling a property if you are in the business of providing residential rental accommodation. This means that your intention needs to be clearly long-term rental and not speculative.

Can I Claim for Due Diligence When Buying a Rental Property?

Mostly, yes. This is a grey area as it depends entirely on the intentions for the property and the outcome of negotiations. Builders and LIM Reports are always treated as capital expenditure and so are not deductible. However, other due diligence costs might be.

If you go ahead and purchase the property and then operate it as a rental, then the due diligence is most likely deductible. The deduction depends on whether the due diligence is in the form of advice, coaching and support with regards to the management of the property as an income generating rental. Due diligence with regards to financing, general property education and leveraging advice would not be deductible. These items are considered more to do with the acquisition of the property than the generating of income from it and so they are deemed to be capital in nature.

Can I Claim for Builders Reports When Assessing a Rental Property?

No. Builders reports are considered to be capital in nature and so are not deductible. This is because the builders report is solely for the purchase and not for the ongoing rental income generation. A deduction is allowed only when there is a direct link to the income generation.

Can I Claim for LIM Reports When Assessing a Rental Property?

No. LIM Reports are directly related to the purchase of the property, not generating income from it. An income tax deduction is only available for expenses incurred in the generation of the taxable income. LIM Reports are therefore deemed to be a capital expenditure.

Can I Claim for a Registered Valuation When Buying a Rental Property?

Yes. But only if the cost is for the express purpose of securing finance for the rental property. You can’t claim for valuations that are for insurance purposes or to help you identify a reasonable offer/ purchase price. Many banks require a registered valuation before they will finalise your mortgage so it helps that this is a tax deductible cost.

Can I Claim for my Travel Expenses to View a Rental Property?

No. If you have to drive, fly or sail to an open home that cost is unfortunately not deductible.

Once you own the rental property, you can claim for your travel costs to inspect the property, you just can’t make the same claim for inspecting it before you’re the landlord.

However, some costs of acquisition, like loan fees, can be deducted.

Can I Claim for Loan Fees When Financing a Rental Property?

Yes. Fees for arranging the financing of a rental property are deductible.

This can be confusing as the purchase price itself and most of the associated costs (like the capital portion of the loan) are not deductible. However, there is specific guidance from the IRD allowing the deduction of loan fees.

Can I Claim for Finders Fees Paid for a Rental Property?

No. This type of expense is deemed to be capital in nature and therefore not tax deductible. Finders fees are a cost associated with the acquisition of the property rather than the operation of the property as a rental. As such, they have no direct link to the generation of taxable income.

Capital expenditure such as this can be claimed as a deduction against any tax on capital gains, such as a CGT/ Bright Line Test tax, so it still helps to keep a record of it.

Can I Claim for Property Mentoring, Coaching or Education?

Mostly, yes. This is a bit of a grey area and depends on the specific program and nature of the advice and support.

Property investment education that is centered on how to find and finance a property is likely to be considered capital in nature. This is because this type of education is not directly related to the generation of taxable income. Rather its advice for the accumulation of wealth and the leveraging of any existing wealth.

Property investment advice, mentoring and education that is focused on managing your rental, setting and maximising rents and dealing with ongoing property issues would be deductible. This type of expense is directly related to the income you generate from the rental property.

Most often, the costs of chatting with your MBP Advisor are totally deductible. If you’re on one of our rental property packages then chatting with us about your rental portfolio is totally FREE. So reach out to your advisor today for tailored, expert advice and support. Don’t have and advisor? Get one today by reaching out to the team at MBP.

 

Note: The above information is general in nature and accurate at the initial time of publication. Every effort is made to keep this page updated but you should always get specific advice tailored to your unique situation, so don’t hesitate to get in touch with our team of property tax professionals.