Identifying Complex Broking Needs
Ray Murdoch and Steve Brown jointly own a successful and growing business that manufactures metal pallets. They trade under the name Pallets-R-Us Pty Ltd. The pallets are manufactured using material that is lightweight and durable. There has also been a very structured approach to the research and development for the engineering and design of the pallets. The pallets are used in all industry sectors. Part of the process involves powder coating the finished product, which is currently outsourced to a local well-established contractor.
It is critical that Ray and Steve’s product meets market needs. They need to maintain sustainable production and operating costs if they are to forecast their sales and cost of sales.
They have a well-established client database that provides them with repeat ‘business-to-business’ dealings. While they have only been trading for 30 months, they have a solid business plan with written supply contracts with three major business clients and several smaller business clients.
Ray and Steve now require finance to assist them with the purchase of a sophisticated machine, using the technical platform system CNC. This machine can be programmed to rapidly fabricate multiple components. The machine has an expected commercial lifespan of at least 15 years with operating software to be updated every three years. This software and upgrades is included in the purchase price of $800,000.They need to import the machine from the US. Initial enquiries with the US supplier have indicated that they will require a letter of credit for the import of the machine.
Their business employs five people and, with the expected increase in business through the automation of production, they have forecast that they will need to recruit an additional two staff members in the next 3–6 months to meet sales/production demands.
Ray has been in the metal fabrication field all his working life. He has an MBA and understands financial management. He also has solid engineering skills and developed the majority of the design works for the business. He is married and has no dependants. His wife is a school teacher and she will be retiring at the end of the year.
Steve worked with Ray at ‘Protech’ as a foreman. His skills are in production and managing project/job flow. He has high level technical skills and can complete works to specification at a high standard.
Steve and Ray have provided the last two years financial accounts for the trading business, as well as interim accounts for the current financial year. Ray’s brother provided business with a loan $500,000 when the business commenced and he is being repaid interest plus a principle repayment of $30,000 per annum.
Applicant information
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Client |
Ray Murdoch |
Steve Brown |
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Current address: |
Unit 43, 25 High St Northville, |
23 Desmond Lane Northville, |
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Home phone: |
9001 2121 |
9002 1212 |
|
Status |
Ray is divorced with no dependent age children |
Steve is married with no dependents |
|
Employment |
Self-employed business owner |
Self-employed business owner |
|
Income |
$100,000 per annum |
$100,000 |
|
Property value |
$750,000 |
$900,000 |
|
Cash at bank |
$12,500 |
$9,600 |
|
Contents |
$100,000 |
$85,000 |
|
Superannuation |
$250,000 |
Steve $350,000, Kate $60,000 |
|
Motor vehicle |
$40,000 |
$55,000 |
|
Home loan |
$250,000 repayments $2,068p.m., P & I, 18 years remaining |
$350,000 repayments $2,645 p.m., P & I, 22 years remaining |
|
Credit card |
$25,000 limit with debt of $15,000 payment @3% |
$10,000 limit with debt of $3,000 payment @3% |
|
Car loan |
$0 |
$15,000 repayment $746p.m., remaining term 4 years |
The business
|
Year 1 net profit after tax |
$200,000 |
|
Year 2 net profit after tax |
$220,000 |
|
Current year interim profit (10 months trading) |
$200,000 |
|
Wages to partner 1 – years 1 and 2 |
$100,000 |
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Wages to partner 2 – years 1 and 2 |
$100,000 |
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Principal repayment to Ray’s brother repaid annually |
$30,000 |
Key balance sheet items
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Cash |
$25,000 |
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Debtors |
$220,000 |
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Creditors |
$100,000 |
|
Notes |
The business currently meets all creditor payments at 30-day terms. Debtor collection has been solid. They invoice an upfront payment of 50% of the sale price, which assists in funding their production. They have orders of $1m over the next 3 months and have made an increase in their gross profit margin. The orders are from several clients, so their debtors will be well spread. |
Task 1a — Identify the clients’ complex broking needs
Prepare a list of questions that you would need to ask Ray and Steve about their history, experience, business performance and the intended equipment purchase.
In preparing your list of questions you should ensure that you cover the following:
- the complex features in importing and purchasing this equipment and benefits that will come to the Company from such purchase
- the identification of potential risks in such a transaction and Ray’s and Steve’s tolerance of risk
- the financial aspects of the transaction and current financial position of the business.
Developing Complex Broking Options
(800 words)
Student response to Task 1a
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The question list which is prepared is focused for the business undertaken by Ray Murdoch and Steve Brown and helps to understand the nature of the business and also its operations. In addition to this, the questions will also be useful in getting an insight in the financial requirements of the business and also obtain useful information about the day to day operations and needs of the business. The question list is also prepared for the reason for assessing and identifying the risks which are associated with the business. The question will able help in identifying the current financial obligations of the clients. The questions are presented below: |
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Assessor feedback for Task 1a: |
Resubmission required? |
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No |
Task 2a —Develop complex broking options
You are required to prepare a full report addressed to Ray and Steve outlining available loan options; the process and the risks (potential and real) of which they should be made aware.
In a suitable report format you should cover the following:
- the parties to the loan
- outline the type of letter of credit (LC) likely to be used, the parties to the LC and the high-level steps involved in setting up and establishing LC to enable import of the equipment
- the product options that are available to finance an equipment purchase once it has arrived in Australia
- your recommendation of best product option, including amount, security/collateral, term, potential interest rate and residual value (if any)
- name three (3) lenders that would consider and potentially approve this transaction and advise Ray and Steve about product type, loan term, interest rate, balloon payment (if applicable) and monthly repayment they offer
- the procedure to commence the import of the equipment and the loan, including documentation Ray and Steve need to provide
- the client responsibilities, so Steve and Ray fully understand the facility being proposed
- outline the risks (potential and real) of which Ray and Steve should be made aware
- whether personal guarantee will be required from the Director’s spouse
- a summary of all fees and charges — including those for setup and those of the lender
- advise which relevant disclosures need to be made
- a request for client to inform you of any questions about the transaction and/or provide an instruction to proceed.
(800 words)
Notes: Any assumptions you make should be listed, and not be in conflict with the case study information already provided.
You are to write a report to your clients, demonstrating your professional writing skill — not simply commenting on each of the points detailed above.
The use of tables in the report to set out some of the numeric information may be of benefit.
Student response to Task 2a
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Assessor feedback for Task 2a: |
Resubmission required? |
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No |
Task 3a — Implement complex loan structures
Ray and Steve have accepted your recommendations and have given you authority to proceed with their application.
As part of implementing their loan application you are required to prepare a formal written loan submission to the lender for pre-approval. Your loan submission must include the following:
- details of borrower, guarantors and all contact details
- borrowers background
- an overview of the proposal — what the finance is for
- the proposed structure of the facility being recommended — product type, deposit amount (if required), loan amount, term, interest rate and residual value (if any)
- full details of the security/collateral that is to be provided
- serviceability calculations including Debt Service Cover Ratio (DSCR) calculations, including all personal borrowing facilities of the directors
- provide a ‘funds-to-complete’ table including statutory costs and any relevant fees
- highlight the relevant risks — industry, business, transactional — and how they are mitigated
- any other information that is relevant to assist the lender provide an approval
- your comments and recommendations
- list attachments
(800 words)
Notes: Any assumptions you make should be listed, and not be in conflict with the case study information already provided.
You are to write a formal submission to the lender; not simply commenting on each of the points detailed above.
The use of tables in the report, to set out some of the numeric information, may be of benefit.
Student response to Task 3a
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The important information which are available for the business are shown below in a table form showing the net profit for the current year in case of the borrower:
Borrowing Entity: Pallets-R-Us Pty Ltd ABN & A.C.N: Address: Unit 43, 25 High St Northville Phone: 9001 2121 Fax: NA Mobile: NA Date of birth: NA Loan Amount: $800,000 Purpose of the loan The main intention behind taking the loan for the business is to finance the requirement of a machinery which will improve the efficiency of operations. The machine is to be imported from outside the country and so appropriate funding is necessary. The loan will help Ray and Steve to purchase the machinery and also provide some stability to the liquidity situation of the business. Funding Position The requirement of loan is for the purpose of purchasing the machinery for the business and also improving the liquidity situation of the business. The loan down payments are to be made in instalments and therefore the same does not affect the liquidity position of the business. In order to maintain the liquidity position, rate of interest, operating expenditure also play a vital role. Security The data which is provided by the business are checked by NCCP for viability purposes and also provide a basis for the lenders to assess whether they should provide loan facilities or not to the client based on the credit rating of the client. NCCP takes enquiry of loan amounts and also check track record for servicing of loan for Pallets-R-Us Pty Ltd. Description of Machinery The purchase price of the Machinery is estimated to be $ 800,000 for which the owners intend to take financial assistance from a lender. The machine is to be imported from a foreign country. This machine can be programmed to rapidly fabricate multiple components. The machine has an expected commercial lifespan of at least 15 years with operating software to be updated every three years. The machine is needed to be imported from the US. Initial enquiries with the US supplier have indicated that they will require a letter of credit for the import of the machine. Repayment structure of the New Entity The loan repayment structure focuses on different requirement of the loan which the business needs to fulfil. Some of the requirement which needs to be fulfilled are OSR requirement, ATO Consideration, State Legislations. These requirements are applicable to the business and therefore must be fulfilled
Serviceability Calculations: The serviceability calculations consider the loan amount which is paid and in relation to the same the various fees which is incurred by the client business. Sale Price: $800,000 Stamp Duty: $38800 Lodgement fee: $6500 Transaction fee: $10 Property Valuation review fees: 200 Total: $45,510
Recommendation The business which is operated by Ray and Steve can utilize the loan option and take the same from ANZ bank on a instalment payment basis. This loan taken will help the management to purchase the machinery which will definitely improve the efficiency of the business and also the production capacity of the business which implies that the profitability of the business will also increase. It is recommended that the management should move forward with its plan and select instalment loan system. |
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Assessor feedback for Task 3a: |
Resubmission required? |
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No |
Assessor feedback:
|
[insert feedback] |
|
|
Date assessed: |
Click here to enter a date |
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Does the student need to resubmit? |
No |
|
Questions that need to be resubmitted |
|
|
First submission |
Not yet demonstrated |
|
Resubmission |
Not applicable |
To pass this subject, you will need to be assessed as DEMONSTRATED for either your first submission or your resubmission.
Section 2: Case Study B — Bill Smith and John Jones – Commercial Premises Finance
Background
You are meeting with prospective clients, Bill Smith and John Jones. They have been referred to you by their accounting firm, Buckland Accountants.
The prospective clients need assistance with the acquisition of owner-occupied premises to replace their current business premises, which they rent and is becoming too small for their growing business.
True Blue Pty Ltd trades as True Blue Real Estate and was purchased as an existing real estate business three years ago. Bill Smith and John Jones are the directors.
The shareholders of True Blue Pty Ltd are Bill Smith, John Jones and a private investor, Amanda Williams, who does not work in the business and has no involvement in its day-to-day operation. Each holds an equal one-third share in the company.
Bill and John have each been in real estate for approximately 15 years, focusing on residential sales and leasing. They have gained their work experience in the local area. A wealth of knowledge of the area, coupled with an ever-expanding client base, has resulted in sustained and solid growth for the business.
Details of the property
Sale price of the property is $950,000. (There is no GST requirement as it is being purchased as a going concern.)
A deposit of $95,000 has been paid and is being held in the trust account of the settlement agent/solicitor.
A cash contribution of $233,240 will be made from the general working account of the business.
Property purchase and loan to be in the name of a new entity — True Blue Pty Ltd as trustees for the Smith Jones Unit Trust. There are a total of 99 units in the trust and the unit holdings mirror the shareholding of the trading entity, True Blue Pty Ltd.
The property is situated at 100 Smith St, Yourtown, with contracts exchanged at today’s date and an anticipated settlement date of 90 days.
General observations about the property
The property is in good condition and is well located in the same street as the current rental premises.
It is anticipated that the premises will meet the needs of the business for the next 10 years.
Summary of initial client fact find
Bill and John have provided the last two years financial accounts for the trading business, as well as interim accounts for 10 months of the current financial yea
True Blue Real Estate’s financial accounts
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Year 1 |
Year 2 |
|
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Net profit after tax |
$92,000 |
$140,060 |
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Current year projected – $175,000 |
||
|
Add back (rent) |
$47,000 |
$49,142 |
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Additional superannuation to director |
$31,400 |
$34,539 |
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Wages to partner one |
$70,640 |
$70,640 |
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Wages to partner two |
$70,640 |
$70,640 |
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Payment to private investor (fixed flat profit fee) |
$45,000 |
$45,000 |
Applicant information — Bill Smith
|
Personal details |
|
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Address |
26 Nowry Road, Yourtown, 1234 |
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Date of birth |
17 February 1958 |
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Phone |
7890 1234 |
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Financial details |
|
|
Gross income |
$70,640 |
|
Owner-occupied property valued at |
$550,000 |
|
Outstanding debt on owner-occupied property |
$210,000 repayable at $1,379 per month P & I, 6.2% p.a. interest rate |
|
Credit card with limit $15,000 |
Outstanding debt — $5,000 |
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Superannuation |
$250,000 |
|
Motor vehicle valued at |
$30,000 (nil debt) |
Applicant information — John Jones
|
Personal details |
|
|
Address |
14 Mary Street, Yourtown, 1234 |
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Date of birth |
14 October 1970 |
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Phone |
0146 234 577 |
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Financial details |
|
|
Gross income |
$70,640 |
|
Owner-occupied property valued at |
$750,000 |
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Outstanding debt on owner-occupied property |
$300,000 repayable $2,159 per month P & I, 6.2% p.a. interest rate |
|
Credit card with limit $5,000 |
Outstanding debt — $1,000 cleared monthly |
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Superannuation |
$200,000 |
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Motor vehicle valued at |
$45,000 |
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Outstanding debt on motor vehicle |
$15,000 repayable $623 per month, fixed interest rate |
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Business details |
|
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Cash in business account |
$400,000 |
Other information
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Applicants’ solicitor |
Moffat and Co (contact is Maree Moffat) 16 Tatlor Street, Yourtown, 1234 |
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Phone |
7890 5678 |
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Applicants’ accountant and registered office |
Buckland Accountants (contact is Simon Williams) 28 Mary Street, Yourtown, 1234 |
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Phone |
2982 0987 |
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Applicants’ banker |
Westcoal Building Society, Yourtown, 1234 |
Notes:
- Assume for credit card debts, the minimum monthly commitment should be calculated at 3% of the credit limit.
- Each of the working directors has appropriate death, income and disability insurance in place.
- A sensitisation factor of 2% should be used when calculating financial commitments.
Task 1b — Identify the clients’ complex broking needs
Prepare a list of questions that you would need to ask Bill and John about their history, experience, business performance and the property purchase.
In preparing your list of questions you should ensure that you cover the following:
- the complex features of Company and Trust structure and benefits that will come to the Company from purchase of this property
- the identification of potential risks in such a transaction and Bill’s and John’s tolerance of risk
- the financial aspects of the transaction and current financial position of the business.
In addition to the list of questions, please also comment on any potential risks you identify (you are permitted to make assumptions here). In considering these risks you should consider:
– how you would identify the risks and the criteria you used to evaluate these risks
– how you would assess their current debt exposure; the tools you would use in terms of risk probability, impact and consequences.
(800 words)
Student response to Task 1b
Task 2b — Prepare complex broking options
You are required to prepare a full report for Bill and John by outlining the process and the risks (potential and real) of which Bill and John should be aware.
In a suitable format, outline to the directors the options available to them and the process that will need to take place for them to complete the new property purchase and establish the loan.
In developing your report you should cover the following:
- the parties to the loan
- what is the best loan structure for this transaction — provide Bill and John with options to use their own residential properties as cross security or use a cash contribution and use the property to be purchased as the property
- your recommendation of the best option, including amount, security/collateral, term, repayments and potential interest rate
- name three (3) lenders that would consider and potentially approve this transaction, and advise the client of the product type, loan term, interest rate, ongoing fees, balloon payment (if applicable) and monthly repayment they offer
- the procedure to commence the loan, including documentation Bill and John need to provide
- the client responsibilities, so Bill and John fully understand the facility being proposed
- outline the risks (potential and real) of which Bill and John should be made aware
- the name in which the client will sign the contract to purchase and, given Trust involvement, in what name will it be registered (this varies state to state so please advise which state you are from)
- a summary of fees and charges — including those for setup and those of the lender
- a request for client to inform you of any questions about the transaction and/or provide an instruction for you to proceed
- advise which relevant disclosures need to be made
(800 words)
Notes: Any assumptions you make should be listed, and not be in conflict with the case study information already provided.
You are to write a report to clients demonstrating your professional writing skill, not simply commenting on each of the points detailed above.
The use of tables in the report, to set out some of the numeric information, may be of benefit.
Student response to Task 2b
Task 3b — Implement complex loan structures
Bill and John have accepted your recommendations and have given you authority to proceed with their application.
As part of implementing their loan application you are required to prepare a formal written loan submission to the lender for pre-approval. Your loan submission must include the following:
- details of borrower, guarantors and their contact details
- borrowers’ backgrounds
- an overview of the proposal — what the finance is for:
– the proposed structure of the facility being recommended — product type, deposit amount (if required), loan amount, term, interest rate and residual value (if any)
– full details of the security/collateral that is to be provided
– Sensitised serviceability calculations including Debt Service Cover Ratio (DSCR) calculation and all personal borrowing facilities of directors (sensitisation rate is disclosed in case background)
– provide a funds- to-complete table, including statutory costs and any relevant fees
– highlight the relevant risks, industry, business, transactional and how they are mitigated
– any other information that is relevant to assist the lender provide an approval
– your comments and recommendations
– list attachments.
(800 words)
Notes: Any assumptions you make should be listed, and not be in conflict with the case study information already provided.
You are to write a formal submission to the lender, not simply commenting on each of the points detailed above.
The use of tables in the report, to set out some of the numeric information, may be of benefit.
Student response to Task 3b
Assessor feedback:
|
[insert feedback] |
|
|
Date assessed: |
Click here to enter a date |
|
Does the student need to resubmit? |
No |
|
Questions that need to be resubmitted |
|
|
First submission |
Not yet demonstrated |
|
Resubmission |
Not applicable |
To pass this subject, you will need to be assessed as DEMONSTRATED for either your first submission or your resubmission.
