A long time client came in to see me the other day looking to purchase a block of units. Having just settled on the sale of his business and profiting quite nicely from that, was looking to use some of those funds to cover off the deposits and closing costs for the new unit block. We took a look at the financial statements and tax returns but couldn’t use them for servicing because the business that they represented had been sold.
So the discussion turned to the profit from the sale of the business and could that be used as evidence of servicing the new loans? Now go back before the Global Financial crisis, that answer could have been a yes, but today it’s a frank no. The reason it’s a no, is the money is not reoccurring and what I mean by this is it has only been produced / created the once, we cannot sell the business again and again. We can use the interest derived from the principal if it was placed in a term deposit, as that is reoccurring on a monthly basis and we could use the rent that it generated if used to buy a property like he was intending. Another way to put it is, it’s a once off sale that will not happen again next financial year. Now in this example it is sort of going against the borrower, but this also works in reverse where we have a non reoccurring expense. An example of a non reoccurring expense is say you have a business and you had to pay a large legal bill of $30,000 and the case was settled from this, then you wouldn’t incur this bill again in the following financial year. In this case the $30,000 would be added back into your financials and strengthen your position.
So no, you cannot use non reoccurring income to service debt – Sorry.