How to consolidate your business debts? Real World Solutions!
If you’re a business owner finding yourself in a position where you have multiple sources of debt and are struggling with cash flows, you’re not alone! The good news is that there are ways you can easily resolve this, using a debt consolidation loan and formal restructuring.
In this article we will cover what a debt consolidation loan is, the advantages, what you need to consider before doing one and whether restructuring should be something you consider.
Because we are also business advisers, we are aware that in certain instances you may qualify for formal restructuring programs that could discount your debt by up to 80%!
What is debt consolidation?
Debt consolidation is the practice of refinancing all your debts into one finance facility (sometimes more, but the less the better). Essentially a new lender or existing lender, lends you more money to repay all your liabilities and to put them into one facility!
When doing a debt consolidation loan priority has to be given to critical items such as loans that are in default, tax debts and staff entitlements.
Why do people consolidate their debts?
Business owners typically consolidate their debts because they find themselves sinking under an avalanche of liabilities. Most of the time this is because they have gone through some type of hardship.
The list of liabilities can include supplier payments, bank loans, ATO debts, employee entitlements, employee super entitlements, payroll tax, land taxes, rates notices, GST payments, bank loans, private loans, 2nd mortgage loans, home loans, business cashflow loans and personal loans from friends.
All these liabilities and their penalties can add up as a function of time!
All of this adds stress to business owners, and worse yet takes up bandwidth in their minds (known as the bandwidth tax). Which prevents business owners from dedicating mental resources to other endeavours, such as growth!
What are the benefits of a debt consolidation loan?
There are many benefits of a debt consolidation loan, and this largely depends on who is consolidating the debt for you! A bank or a private lender? As each will offer different terms. Generally speaking the key benefits of a debt consolidation loan are:
- One loan facility, that refinances all your other debts into one facility.
- You will get out of arrears with other facilities or avoid penalty interest rates, through your refinance.
- Your new loan facility should have a lower cost of capital, when you consider all other costs.
- You have more free cash flow available to you, due to the repayment structure (read more below on what makes a good debt consolidation loan).
- You will have the mental bandwidth to focus on growing your business!
- If you refinance your ATO debts and bank arrears as part of your debt consolidation loan with a private lender, you will then after a period of time (subject to credit scores), be able to re enter the banking system.
What to do before consolidating your debts
As business advisers we ask one key question prior to consolidating any debt. That is, if your liabilities were consolidated into one facility at a lower rate or a more easier repayment structure, will you be able to trade your way out?
In other words, just because you can consolidate your debts, doesn’t necessarily mean you should, if there are fundamental structural issues in the business!
Debt consolidation loans and small business restructures
If you have total debts of under $1M, then you may also be eligible for a small business restructure (SBR). SBRs are great if you can evidence that if your debts were reduced and restructured, you would be able to trade your way out of trouble. SBRs can reduce your liabilities by up to 80% in certain instances. An SBR in addition to a debt consolidation loan may be an optimal solution for your situation. You can read more about our business advisory services here.
What makes a good debt consolidation loan?
As specialists in debt consolidation loans, a good refinance must have the following components.
- Repayments of the consolidated debt must be free cash flow friendly to the business. In other words, the repayment structure of principal and interest, must not adversely effect the cash flow of the business. Additionally the cost must be less than the previous aggregate cost of all debts (including penalties).
- Interest repayments should be capitalised for a period of time to give the business breathing room to reinvest funds, or they must be interest only.
- Any principal repayments of the consolidated debt must be amortised over as long a time as possible, to reduce cashflow strains on the business.
- The lender must understand your business and what you are trying out achieve. This means you should not refinance with a predatory lender, that will penalise you unnecessarily.
Bank debt consolidation loans vs private lender debt consolidation loans
Whether you consolidate your debts through a private lender or bank will largely be determined by your credit score, serviceability that you can demonstrate, ATO debts and other factors.
If your situation is light touch, in other words you have a number of debts you wish to consolidate but aren’t in arrears on any loan facilities, don’t have large ATO debts and can demonstrate serviceability then a bank solution may be for you.
If on the other hand you have ATO debts, are in arrears and can’t demonstrate serviceability, then consolidating your debts with a private lender may be the solution. This option would be used until such time your credit file and serviceability is rehabilitated.
The advantage of a debt consolidation loan with a private lender is that interest can be capitalized and that they look at the quality of security rather than immediate serviceability. Additionally, some private lenders aren’t concerned by ATO debts etc and will still facilitate a loan for you.
If you’d like to know which solution is best for you, contact us here.
A real life debt consolidation loan
A client of ours came to us this year with various liabilities that they were struggling to manage. Additionally because their business performance had taken a hit, their bank was unwilling to lend to them more money as they did not meet bank serviceability requirements.
The bank only made matters worse because the bank wanted the clients repayments to switch to principal and interest repayments instead of their current arrangement of interest only repayments.
The business had a $3M bank facility, had fallen into arrears on serval repayment to creditors, had significant ATO debts of at least $500k, staff entitlements of at least $200k that weren’t provisioned for and loans from friends of $400k.
The couple had properties worth $8M, and despite the Low LVR of the loan the bank was unwilling to lend them more money. Additionally, the couple required funds within the fortnight before their own bank was going to take legal action against them!
Fortunately, the couple were referred to us and we were able to organise a family office to consolidate all their debts into one facility at a very competitive second tier rate, despite it being a private loan.
A key feature of the loan was that not only were they able to consolidate all their debts (including ATO debts) into one facility, but the family office gave them additional working capital to improve their business! To make the life of the client easier, interest repayments were capitalised meaning they did not have to service the loan, allowing them to reinvest those interest payments back into their business!
To give the couple more comfort, an option period was added in on the original maturity date of the loan, giving them ample time rehabilitee their credit file and serviceability to refinance in future via bank.
Despite them being a bank client for over 5 years and having adequate security, our family office client provided them with a solution when their own bank couldn’t!
To speak to us today, contact us here.
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