Can you consolidate your business debts? (A Case Study)

If you’ve ever had a sleepless night or been at the gym during the day, it’s likely you’ve seen TV ads for personal debt consolidation in Australia. 

Debt consolidation isn’t really a product, but a series of financial processes – it’s the act of taking out a comparatively lower-interest loan to pay off smaller, higher-interest loans or lines of credit in one hit. 

The net result is that you combine (or consolidate) all these paid-off loans into one loan product, making one repayment per month, fortnight, et. al. instead of having your business cash flow destroyed by many repayments (some can even be due daily).
Here is a case study on how debt consolidation for a business can help an otherwise profitable business return to a positive cash flow position after being hit with a massive revenue shortfall and eventually setting themselves up for growth.

Business debt consolidation in Australia loan case study

An owner of a metals business contacted us as they were having cash flow issues due to having an overextension of smaller high-interest loans they had self-sourced over a 2 year period.

They were, at least according to their financial statements, profitable.

At the beginning of the COVID-19 pandemic, their revenue fell 90% – they were only making 10% of their usual monthly turnover when their state government imposed blanket lockdowns.

With few options available and government support yet to be announced, they took out some expensive unsecured business loans for cash flow to keep the business alive and keep their staff employed.

Full disclosure: there are times we advocate using unsecured business finance in select instances. However, when they are used as revolving lines of credit – consistently paying them down and borrowing slightly more over time – interest rates can often exceed 50% p.a. That means for every dollar spent, they needed a dollar fifty to cover the repayments.

Depending on the lender and the terms, these rates can blow out even higher.

The business was – as we discussed earlier – suffering a death of a thousand financial cuts. 

Their accounts were effectively being raided by daily direct debit payments. This was jamming up their business’s cash flow as they had to agree to extremely short-term business loans to consolidate debts, sometimes with terms within a mere few months. 

As you may be aware, the shorter the loan term, the higher the repayments usually are.

They were, on paper, quite profitable. However the cash flow issues were causing them to slowly go out of business.

According to ASIC, 51% of corporate insolvencies in 2018-19 occurred due to inadequate business cash flow or high cash use.

The owner confided in a fellow business associate who handed over our details.

Looking at their situation, we found that the business’ credit report was dire. However, we identified areas for improvement. 

First, we were able to raise capital at a much lower rate – an eighth (⅛) of what they were paying. It almost seems too good to be true – but it was possible.

Luckily, they had wholly-owned or unencumbered business equipment in their business. A lender offered a sale and leaseback agreement for the equipment, which allowed the metals business to apply for a refinance with drastically lower rates and a five-year loan term – which gave them far greater flexibility in terms of repayments.

Though the business was on the brink of crisis, there are avenues out of the woods when facing high cash use or inadequate cash flow for many businesses in this situation.

Advantages to business debt consolidation

There are many advantages to consolidating your loans if you haven’t considered doing so already.

Avoiding Insolvency

As mentioned, high cash use and inadequate cash flow are the leading cause of corporate insolvency. Stacking unsecured or short-term loans on top of one another not only trashes your company’s credit file but can lead to insolvency. 

Honouring Direct Debits

Direct debit dishonour fees can range anywhere from $10 to $35 if you do not have adequate cash in your nominated account. Though this may not seem like much, this represents an extra 35% in fees on top of a $100 payment. If these occur frequently, they can quickly add up and strangle cash flow further. 

Lower Cost, Easier Debt Management

Owners of businesses can reduce their monthly debt payments while consolidating their debts. The modest monthly payment is intended to reduce financial stress since it is easier to handle than previous debt payments. The primary benefit of using this sort of financing for businesses is a cheaper monthly cost.

Freeing Working Capital

Debt consolidation in Australia for business frees up cash flow and gives you more working capital so you can seize upon nascent opportunities. It helps you keep your payroll on time, keep up with supplier payments, and go ahead with new projects.

Improves your Credit Rating

Taking out additional business loans for cash flow to cover already ballooning finance arrangements can ruin your credit rating. A poor credit rating means other businesses may be reluctant to supply you with materials or goods and lenders may insist on “bad credit” or higher interest loans if you require additional finance – or refuse to extend any more credit to you, period. Consolidating debts and paying them off on time and in full improves your creditworthiness with credit reporting agencies and in turn, the wider business community.

Setting Businesses Up for Growth

The lifeblood of any business is cash flow. With adequate cash flow and abundant working capital, you can look toward the future and execute your strategic plan. Dealing with small short-term business loans eating into your bottom line is like “firefighting” – as soon as one spot fire is out, an ember sparks up another and you’re repeating the process day in, day out.

If your business is struggling with small, high-interest loans eating into your cash flow, the team at darkhorsefinancial.com.au can help with a debt relief loan. We can source novel and cash flow-positive loan solutions to help consolidate debts and get your business moving forward again. 

Talk to us about our business debt consolidation in Australia for debt relief loan solutions by sending us a quick enquiry here.