The Impact Of Changing Franking Credits

magnify tlThe widely welcomed cut to the small business tax rate has come with a sting in its tail.

The changes will put pressure on business owners to pay out retained earnings sooner than they might have otherwise planned, to give shareholders the benefit of existing franking credits before they lose some of their value.

The tax rate for 2016-17 has been reduced to 27.5 per cent and the franking rate has been cut along with it. As a result, the value of tax credits held in companies’ franking accounts has fallen too.

Take a business that paid tax at 30 per cent in previous years, but retained the earnings inside the company to use for working capital and investment. For 2016-17, the maximum franking credit it can attach to dividends is 27.5 per cent.

This means it is holding “excess” credits in its franking account and, since they cannot be distributed to shareholders, these excess credits will be wasted. The situation will worsen over the coming 10 years as the tax rate and franking rate both fall to 25 per cent by 2026-27.

The number of companies affected by the changes will also grow dramatically. A “small” business is defined by its turnover, and this threshold rises over the same period from $10 million to $50 million. After much heated debate in federal parliament, the changes became law on 19 May 2017.

The sting is that their effect is retrospective to the start of 2016-17.

This creates a very practical problem for small businesses that paid a dividend for the first half of that year.

Let’s say the company paid a dividend at the end of the December half, attaching a franking credit of 30 per cent. This rate applied in all years up to 2015-16 and was still technically legal when you made the distribution.

But in the eyes of the ATO, that dividend is now “over-franked”, because the maximum franking credit that your shareholders can claim is 27.5 per cent. The ATO is advising companies to write to their shareholders telling them the revised amount of franking credits they are entitled to claim.

Companies are also required to adjust down the value of their franking accounts in line with the declining franking rate.

As the tax and franking rates fall over the coming decade, the value of these franking accounts will slide even further.

The franking credits will also be less valuable in the hands of shareholders, because they will not have the same power to reduce tax on income from other sources.

This creates a dilemma for business owners. Should you pay out retained earnings as dividends faster than you might have planned? If you do, where will you get the capital to fund your daily business operations, and future growth of your business?

If the plan is to finish up in business soon, it might be worth liquidating the company and distributing its funds to shareholders.

If your business is still in its prime, but you do want to return some funds to shareholders, you will need to search for ways to tighten up cash flow and work your capital harder.

This does not have to mean going to the bank for expensive finance, pledging property as collateral and locking yourself in to expensive long-term loans.

Tradeline offers a flexible alternative for importers who purchase both in domestic and international markets.

These financing methods accelerate payment of your receivables and lift from you the burden of chasing debtors, leaving you free to concentrate on the more creative side of building your business.

Questions To Ask When Opportunity Comes Knocking

TL growthFive honest questions advisers and owners should ask yourself when faced with a great growth opportunity

Whether it’s a favourable exchange rate, a supplier discount, earlier shipping, an acquisition opportunity, quicker delivery, a larger customer order or any rare business opportunity, but when business opportunity knocks it is important that you and your client look at the opportunity from all angles. Business growth carries risks, so here are five honest questions to make sure that growth opportunity doesn’t turn around and bite them.

1. What is the real impact on your working capital?

The first thing to come under pressure, particularly for importers and large scale buyers, could be their cash flow. To service your new client or fulfil that big order, they may need to outlay significant money on extra stock, and maybe equipment, staff and premises. Such investments could mean spending big up front, then waiting patiently, sometimes for weeks or months, for the income to flow.

How can a business continue trading smoothly when its cash is tied up in stock and debtors? Trade Finance and invoice financing is potentially a great solution as it can pay suppliers up front (giving the client flexible repayment terms), then bring forward payments on your customer invoices to keep your cash flow cycle within manageable limits. In this way, the business can maximise its buying power and accelerate purchasing decisions, whilst minimising the impact on its cash flow.

Cash is king, so before your business takes on the client it is important to have set clear terms of trade, and understand the new customer’s track record in meeting those payment terms.

2. What is the impact on your customer base?

A large new customer, or an unusually large order from an established one, will skew your customer base so your revenue is more reliant on just a few clients. Naturally, the business will focus on making the most of the opportunity, scale up re-orient the business towards better meeting the needs of that customer. However, this leaves the business much more exposed if that customer terminates their agreement with the business or even fails. A good number of customers helps spread the risk thereby protecting the business against the impact of a major client failure. This means ensuring that you continue to look after existing customers even when you’re flat out pursuing your big growth opportunity. Todays small customer could well be that big opportunity tomorrow.

3. How lucrative is the opportunity, really?

Business history is littered with examples of opportunities which have failed to deliver on their promise. It is always important to run the numbers, calculate the breakeven point, and consider a number of scenarios to test, whilst checking your assumptions. There is risk attached to almost all opportunities, so advisers and owners should ensure that risk is fully worth the reward, and for SME owners that risk is often substantial.

4. What is the impact on management focus?

Before diving into action, take a good look at how things are working already in the business and assess the impact of trying to take advantage of that opportunity.

How much time and effort will the opportunity divert from current areas of focus? How will it impact on current plans? Do you need to scale up in order to take advantage of the opportunity and if so, what challenges might this entail? Do you have the required funding in place to make it happen?

5. Can you pull it off? Does the business have the skills internally to manage the opportunity? Will failure put its’ reputation at risk?

The biggest growth opportunity in the world is worth little if it does not materialise. In fact, if it puts the business at severe risk it can be downright dangerous.

Some honest self-assessment is required at this point about the business’ internal capabilities: 'Do I and my team have the skills to full take advantage of the opportunity over the long term? Does the team have the stamina and commitment to navigate the challenges and see it through? Does the business has the management capacity to ensure it comes off as expected? Can the business keep the opportunity going? If staff and expertise are lost, how can it be replaced? Do we have the right systems in place to make it work? Will our funding be able to support it? Will we be able to recover if it doesn’t happen as expected?'

A thorough assessment from all angles of how that new opportunity will impact on your business will help the business prepare to fund it and make the most of it. It may even save it.

The Key to Protecting Returns for Importers

TL dollarAside from the myriad challenges of forecasting demand for products and services, small and medium sized enterprises (SMEs) that import goods can face serious risks when dealing in foreign exchange (FX) markets, with currency movements hitting some importers with large and unpredictable losses.

The Australian dollar is one of the world’s most volatile major currencies. Speculators buy and sell it frequently, led by the prevailing global and local economic conditions. Upward movements are boosted by ‘flight to safety’ effects and ‘carry trading’ where a dealer sells out of a currency that pays a relatively low interest rate and uses the funds to purchase a higher yielding currency pocketing the difference. Downward movements are influenced by such factors as lackluster economic growth, lower interest rates and global uncertainty, such as that existing around the Trans-Pacific Partnership (TPP) at present, and generally how US President Donald Trump will engage with the world on trade.

These FX swings can significantly hurt your bottom line, but there is absolutely no way to predict which way the dollar will go with any precision. So, once you agree on a price with an offshore supplier, being in a position to lock in pricing and hedging your currency risks can be key to protecting your returns.

Currency risks often overlooked

There are two major ways that a business can hedge its currency risks. The most common way is using ‘FX forwards’. A forward contract is an agreement between two parties to exchange a specific amount in one currency for the equivalent amount in another currency at an agreed rate at a future date.

Essentially, you ‘lock in’ the future rate at which you will exchange your money when the time comes to pay for the goods you are importing. This form of hedging protects you entirely against a fall in the value of the Australian dollar.

The downside is that a forward contract does not let you benefit from any rise in the local dollar, which would reduce the price of the imports in the other currency.

A good alternative to FX forwards are ‘FX options’. When you purchase an FX option, you have the right, but not the obligation, to change an amount of money in one currency into another currency at an agreed rate on a specific date.

You are not required to exercise your option, so if the Australian dollar strengthens, you can just let the option expire and take full advantage of the rise.

But overall, Australian small businesses’ engagement with FX risk products such as options and forwards is relatively low, according to research from East & Partners. In November 2016, the research firm found that around 85% of micro businesses with annual turnover between $1 million and $ 5 million had never used options or forwards.

For SMEs with annual turnover of $5 million to $20 million, that figure was around 70%.

But as SMEs become more educated, and FX platforms become more accessible and less costly, those percentages could trend upward.

Quick finance helps to lock in good pricing

There are other financing options that can help you take advantage of favourable pricing and buying conditions.

A Tradeline facility allows businesses access finance quickly to make purchases sooner. The alternatives are often either waiting to build up the funds over time from cash flow (which may result in the opportunity slipping through fingers), or taking out costly, inflexible business loans which come with a burden of administration.

A Tradeline solution will pay a client’s supplier upfront on the client’s behalf, and provide the client with flexible repayment terms of either 30, 60 or 90 days. This means the business can take full advantage of good (but time sensitive) buying opportunities such as temporary supplier discounts or favourable exchange rates. A Tradeline facility can be set up quickly and the imported goods can be bought virtually straight away.

This is not a hedging strategy, but having better control over the timing of purchases and being able to buy them sooner and quicker when the time is right can help you to secure the best possible pricing on goods you import.

This can be a good step towards more profitable trading. On a $500,000 purchase of capital equipment, for example, this could equate to substantial cost savings, which you could reinvest in the business for growth.

HOW TRADELINE WORKS:
• Credit application to Scottish Pacific Tradeline
• Approval of application (usually within 5 business days)
• Agreements signed (importer and exporter)
• Goods shipped to destination
• Importer reviews Bill of Lading and accepts goods
• Scottish Pacific Tradeline pays exporter
• Importer pays Tradeline within 90 days

How Brokers Can Get Into Trade Finance

Tradeline import exportTrade finance is a burgeoning opportunity for finance professionals, as more and more of their SME clients venture into international markets, empowered by new generations of smarter communications technology and global online marketplaces. But too many brokers are missing out on that opportunity because they mistakenly believe trade finance is a niche business that’s too complex and time-consuming, or non-core to their business strategy.

The reality is you don’t have to spend weeks memorising tariffs, decoding trade agreements and swotting up on global geopolitics. You just have to grasp your clients’ needs, understand what questions to ask, and know where you can place them – and it’s not always with the banks.

If you’re just getting started in trade finance, a series of simple steps will help you meet the needs of importers and exporters while you build your own business as well.

Find out your clients’ aspirations in the global arena

Your client has spotted a potential foreign supplier and you can help them make it happen. Perhaps you’re thinking, ‘I’m new to trade finance, I don’t know how to use it.’ But think of it instead as an opportunity to grow together and help your client achieve their vision.

Ask what your client needs the funding for such may be to purchase stock in advance. Get familiar with their business and the global industry they operate in. It’s vital to show you understand the forces at work in their particular business environment.

Are they desperate to make sure shipments of clothes arrive in time for summer? If you can find a trade finance solution that delivers certainty over their imports, you will be rewarded for it with a happier client and repeat business.

Which countries will your clients be trading with?

Global trade or imports and exports run on international agreements, but every country still has its own quirks. A general knowledge of the environment your client is operating in will help you tailor the right solutions for them.

More information is readily available online. Start with Australia’s official trade experts at Austrade. Here you’ll find summaries of Free Trade Agreements and guides to doing business in more than 80 countries. The World Trade Organisation collects definitive statistics and offers original economic analysis that can quickly get you up to speed on international issues.

Almost every embassy in this country has officers responsible for promoting bilateral trade between the home country and Australia. There are also professional associations that bring together people involved in every trading relationship, such as the Australia China Business Council, the American Chamber of Commerce in Australia and the Australia-China Chamber of Commerce and Industry. And in every foreign city where expat Australians are active, there will be a local Aussie business association that can give you the lowdown on local conditions.

Understand the currency risks involved. Is hedging necessary?

Currencies move against each other every day, but an international deal can take weeks or even months to complete. How can you save your client from getting stuck at the wrong end of the seesaw when importing or exporting?

The solution is hedging, a process for eliminating foreign currency risk when you import or export goods. The client can set an exchange rate now by buying a forward contract for the amount of foreign currency they will require in the future. Or they can buy an option that locks in a rate for a certain point in the future, and decide when the time comes whether it’s necessary to exercise the option or just let it expire.

Signing an import/export deal without hedging is risky practice. Don’t let your client be too exposed to volatile currency movements.

More simply however, being able to buy when the price is right is critical. Tradeline is one alternative financing solution which is unsecured, straightforward, fast and flexible. A Tradeline facility will pay a customers’ supplier upfront (based in Australia or overseas), with repayment terms up to 90 days. This greatly enhances a SMEs buying power, maintains their cash flow and allows them to be far more responsive to buying opportunities as and when they present themselves to support hedging against currency risks and general uncertainty.

Don’t be put off by the terminology

To facilitate communication in global trade, the International Chamber of Commerce has published a set of definitions known as the International Commercial Terms, or IncoTerms.

Some brokers are daunted by the specialist terms and their acronyms, but in fact the concepts are straightforward and the names are pretty self-explanatory. Tradeline has its own handy online guide to this vocabulary.

It’s also a good idea to get your Business Development Manager involved to support you. A committed BDM can be a source of expertise and support, plus a quick link to trade finance providers such as Tradeline. One of the benefits of working with Tradeline is that as a finance professional who may not be fully conversant in trade finance, you can choose to be as involved as you wish in the application and structuring of that finance.

Do more training or head to a trade expo

Once you see the business potential in trade finance, you’ll probably want to learn more to round out your knowledge. There are plenty of options for formal training, or you can take a more fun and informal approach and attend a trade expo to extend your networks and your understanding of finance options. There are numerous expos at which you will find trade finance exhibitors and speakers, such as the Gift and Homewares Association, whose members are highly engaged in importation and international trade.

People with bright ideas and smart solutions will be talking trade all day and you’ll get an accelerated introduction to every aspect of potential clients’ businesses while building your own.

Everything you do to expand your knowledge of the trade finance field will benefit your clients. Ultimately, if their business grows, yours can too.

A Big Year for Scottish Pacific Tradeline

what is tradelineNow that we are into the new financial year, we can allow ourselves a little time to reflect on the past 12 months. Scottish Pacific Tradeline is now assisting more SMEs than ever, in fact we have doubled in size over the course of FY15. We have also expanded our team in China and now have operations in the UK and USA, enabling more businesses to take advantage of international trading opportunities.

What do you have in store for FY16?
If your clients have been importing or exporting over the past year, we have tailored funding options allowing them to capitalise on opportunities, have stock on hand and focus on winning new sales.

Our Trade Finance facilities generally do not require mortgages or charges over your business. This means we can provide funding for more SMEs without the need to use the family home as security* and without interrupting existing bank facilities. It also means a quick approval. Over 90% of new clients are formally approved within 5 business days of application. Our flexible terms (up to 90 days from shipment) allow time to land and sell stock before it has to be paid for. Also, if your clients are importing product from China, our staff in Guangzhou are able to liaise with suppliers without any time zone, language or cultural barriers.

With this in mind, here are some developments and opportunities that may be of interest to your clients:

  • The Japan Australia Economic Partnership Agreement (JAEPA) came into play in January 2015 and is now well established.
  • The China-Australia Free Trade Agreement (ChAFTA) was tabled and signed in June 2015, creating more opportunities for SMEs across both nations. Read more here. The 118th Canton Fair will be held in October, it's never too early to start prepping. The Spring Fair (April) this year drew over 184,000 international buyers!

Cross-border trade is now part of everyday life for an increasing number of businesses and our aim is to help SMEs make the most of the global marketplace. With a range of Trade Finance solutions (Import Finance and Export Finance) Scottish Pacific is well placed to provide a full supply chain finance solution for your clients. With Import Finance, we can fund up to 100% of the cost of goods and provide risk protection against foreign exchange losses. Our Export Finance facilities can help open up new opportunities. Whether it is ro provide cash flow to get products (or services) to market or funding against invoices raised on overseas customers to make it easier to trade on open account terms. We have the widest range of solutions and can tailor a package that assists your clients in the global market.

If we can assist in providing more information to help your clients please call us today on 1300 872 331.

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