How a Property Market Correction Could Affect Your Business

If you're a typical small business owner, your business lending is likely secured against your family property (or your family trust’s property). If your business is going well and the market is booming, securing your business lending against your property gives you the benefit of a good interest rate and the increasing equity in your property can give you the opportunity to borrow more so you can smooth out any bumps in the road.  The question is: What happens if you hit a bump in the road and the property market is on its way down?

Over the last few years, the property market has been on an upward cycle but, like all market cycles, at some point the market will turn.  Recently, there's been a lot of talk about a projected property market correction:

What Could a Downturn in the Property Market Mean for You and Your Business?

When you want to borrow more money to grow your business or to get you through a slow period, your first port of call will probably be your bank manager.  Unfortunately, having less equity in your property makes additional lending riskier for the bank, which means the bank may not be prepared to lend further.  If the LVR is tightened, it could become harder to borrow more money when you need it most and, if interest rates increase, your cost of borrowing could skyrocket.  If you’re currently paying interest at 5% and that rate increases to 6%, your cost of borrowing increases by 20%.  That’s a lot of extra money to find to service your loan, especially when you’re already short of funds.

A downturn in the property market will also change consumer behaviour.  If you're in retail, decreasing house prices shake consumer confidence, which means people spend less. If you're in the construction industry, a decrease in house prices could mean that your existing customers have difficulty sourcing further funds to cover variations and cost increases and your potential customers put off their new build or renovation until times improve. 

We All Know It’s Coming So How Do You Prepare Yourself and Your Business for a Potential Property Market Correction?

  • -Review your short, medium, and long term financial plans.  If you don’t currently have financial plans for your business and yourself, make them.
  • -Take a good look at your finances and your spending.  Ask yourself whether you’re getting ahead or falling behind.  If your business is not making a profit and you’re spending more than you earn, you need to take action.
  • -Review your business tools, software, and contracts and ask yourself whether they are meeting your business needs or whether you need to look at alternatives.
  • -Conduct a business and personal financial health check and run some stress tests on your finances (for example: What if a debtor’s business fails? What if interest rates go up? Can I afford to buy new equipment?)

If you want help preparing your business for what’s around the corner or want to improve your business’ performance, give us a call.  We can help.

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