What is Asset Segregation?

Posted Tuesday, July 22, 2014 Comments (0)

Think about your present situation. You are a small business owner. The first few years in business were lean, but after 10 years you are at a point where you can step away every so often. You have the usual small business headaches, cashflow can be slow at times which means the overdraft gets a little unmanageable, and unexpected repair bills mean that the company credit card gets the odd workout. You run a few company vehicles and pay down the vehicle finance every month.

Why should I segregate my assets between different lenders? 

Think about your present situation. You are a small business owner. The first few years in business were lean, but after 10 years you are at a point where you can step away every so often. You have the usual small business headaches, cashflow can be slow at times which means the overdraft gets a little unmanageable, and unexpected repair bills mean that the company credit card gets the odd workout. You run a few company vehicles and pay down the vehicle finance every month. A couple of years ago, you took a big step and bought your own premises, a nice little office / warehouse building in a modern strata complex. Then of course, there is your home loan – you upgraded to a bigger house for the family recently and have a reasonable size mortgage, but you are handling things fine. Your bank manager calls every now and again, always keeping an eye on the overdraft or any late payments. In general, you are a good borrower and you are happy as you are growing your asset base as you build your business. But what if suddenly business conditions changed and you were not able to make repayments as you always have? Are your property and business assets protected? This is where asset segregation becomes important. 

What is asset segregation? 

In commercial lending, when we refer to asset segregation we are talking about having different lenders for each asset you own. This might mean having your main banking facilities, including your overdraft and credit card with one lender; but an entirely different lender for your vehicles. Asset segregation in a real estate sense may mean having your home loan with one lender, and your commercial property with another lender. In short, we mean having all your lending facilities on stand-alone finance facilities. One lender does not have recourse to any other asset – your assets are segregated. In other words, all your lending eggs are not in the same basket. 

Why is asset segregation important? 

Asset segregation is rarely seen as important when times are good. When things are going well most people make their repayments on time each and every month – your lender has no concerns and neither do you. However, if business conditions change and all of a sudden you can’t make all your repayments, what happens then? The concern for you if you have problems is due to a clause in all lending contracts called an all-monies personal guarantee. If you were unable to make repayments on your commercial property loan, or worse, your home loan, the bank can use the all monies personal guarantee to call in all of your loans for review and may potentially ask for immediate repayment. This may have disastrous consequences for you, particularly if you have your overdraft and credit facilities (the lifeblood of your business) tied in with the same lender. If you segregate your assets amongst different lenders, this ensures that your assets have an extra level of protection, as your lender cannot call in all your loans all at the same time. If your assets are segregated, whatever happens, you can live to fight another day. 

My assets are all with one lender, what do I do? 

If all your assets are tied in with one lender, we recommend you consider a review of your lending facilities and seeing if a refinance to a different lender or lenders is an option for you. Starting a process of segregating your assets might give you piece of mind, and you might also get a better deal with a different lender hungry for new business. If this process sounds daunting, then start with one loan, for example, your home loan, and work steadily from there. Every time you take security away from your current lender, you are adding another ‘brick’ to your asset protection ‘wall’. If this still sounds daunting, it might be time to call your finance broker and ask them to perform a review of your lending facilities. 

My real estate assets are already with different lenders, top of the class for me! 

If asset segregation is old hat for you and you are a segregation expert already – congratulations! You have already taken one of the simplest and practical steps to keep the lenders hands’ away from your assets. However, you must not rest on your laurels. Asset segregation is a great asset protection step, but having different lenders for different assets can mean that it can be difficult to keep up to date as to which lenders are offering the best rates and loan products at any one time. We recommend you keep up to date by reviewing your loan facilities regularly and comparing them to what is available in the marketplace. Alternately, call your finance broker as they have the sharpest market radar of the best lending products. 

In summary… 

Asset segregation is not something that one should think about everyday, but a little bit of time spent reviewing your loan portfolio now, may mean that heartache and financial difficulty are avoided in the future. Segregate and Prosper. Jordan W Birchall is a Partner at Balmain Commercial Brisbane, specialising in sourcing investment and development finance loans up to $3 million for property investors and developers in South East Queensland.


Jordan W Birchall is a Partner at Balmain Commercial Brisbane, specialising in sourcing investment and development finance loans up to $3 million for property investors and developers in South East Queensland. 

Email Jordan: jbirchall@balmain.com.au
LinkedIn: http://au.linkedin.com/in/jordanwbirchall

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