Prior to COVID, our client had a thriving commercial plumbing business. Like many in the industry, the pandemic hit hard, with reduced contracts and delayed payments leading to financial strain. However, as the market picked up again post-COVID, their numbers began improving steadily. Still, the burden of the pandemic remained in the form of costly, self-sourced loans that created a significant drain on their cash flow.
On top of this, the business had accumulated $1M in tax debt. The client was faced with two potential solutions: consolidate their existing debts into a more manageable loan or consider restructuring the business entirely. With the future looking brighter for their business, consolidation became the preferred choice.
Their turnover and cash flow were strong enough to support a $1.1M unsecured loan over five years. However, while loans of up to $250,000 can sometimes be obtained without the need for extensive documentation, larger loans – particularly unsecured ones – typically require financials. The company’s financials had taken a hit during the pandemic, and with losses on the books, the unsecured option was off the table.
The Tailored Solution: Secured Loan with Capitalised Interest
- Cash Flow Relief: By capitalising the interest, the client was able to redirect their available cash flow to more pressing business concerns, including paying down their $1M tax debt. This approach allowed them to stabilise their financial situation without the immediate strain of servicing both the tax debt and the loan simultaneously.
- Flexibility for the Future: The capitalised interest approach also created breathing space for the business to recover from its pandemic-related losses. By the time the interest needs to be repaid, the business is expected to be on even firmer financial ground, with stronger cash flow and better financials. This would enable them to refinance the loan or even explore unsecured lending options once their financial situation improves.
Why This Loan Was the Right Fit
In this case, the combination of a first mortgage loan with capitalised interest was crucial in allowing the business to address its immediate challenges while providing room for future growth. Here’s why this was the ideal solution:
- Secured Loan with Lower Interest Rates: By securing the loan against property, the business was able to access a loan with a lower interest rate than would have been possible with an unsecured loan. This ensured that the overall cost of borrowing was manageable, despite the larger loan amount.
- Avoiding ATO Enforcement: The capitalisation of interest gave the business the breathing space it needed to focus on paying off its tax debt. This is significant because it helped them avoid any potential enforcement action by the Australian Tax Office (ATO), which could have included garnishing accounts or placing liens on assets. By proactively managing the tax debt, the business was able to maintain control over its financial future.
- Improved Financial Outlook: The structure of the loan was designed to align with the company’s projected financial recovery. With turnover increasing and cash flow stabilising, the business is expected to be in a much stronger position within a year. At that point, they will be far enough removed from the loss-making pandemic years to consider refinancing the loan or transitioning to an unsecured option with more favourable terms.
Key Benefits of This Approach
- Preserving Cash Flow: Capitalising interest allowed the business to preserve its cash flow for day-to-day operations and critical payments like tax obligations, which was vital to its continued operation and recovery.
- Future Flexibility: This strategy provided the client with a clear pathway to financial recovery. After one year, the business could refinance the loan under more favourable terms or secure unsecured financing once they’ve demonstrated improved financials.
- Tailored Solution for Unique Challenges: This loan was structured with the unique challenges of the business in mind. The post-COVID recovery created an opportunity for growth, but also highlighted the need for a financing solution that wouldn’t strain the business’s resources. A first mortgage, combined with capitalised interest, was the perfect balance between providing necessary capital while keeping short-term obligations low.
- Strategic Debt Management: By choosing consolidation over restructuring, the business retained full control over its operations while addressing its debt obligations. This solution also ensured that their tax debt was managed, reducing the risk of future penalties or enforcement action.
In conclusion, this case study demonstrates how a strategically structured loan – even a secured one – can create substantial value for a business, especially when navigating a post-crisis recovery. At Dark Horse Financial, we understand the need for tailored financial solutions that don’t just solve problems but also enable businesses to thrive in the long term.
