Two or three cash flow loans at once, and how to unwind them

Loan stacking is holding two or more cash flow loans at the same time. Lenders that take security register it on the PPSR, where it ranks by registration date, and each contract decides what a default on another facility means. Unwinding a stack takes a written payout figure from every lender and one settlement that clears them all.

How a business ends up with three of them

Almost nobody sets out to hold three cash flow loans. It happens one at a time. The first facility covers a gap; the daily debit then makes the next gap arrive sooner; a second lender is happy to lend against the account as it now looks; and by the third, the debits are the largest regular payment the business makes.

The industry has a name for it. The Australian Small Business and Family Enterprise Ombudsman's 2018 report on fintech lending called it "loan stacking", and described it as a risk factor each lender looks at differently. The same report found that more than three in five of the lenders it surveyed would lend to a business a competitor had already lent to, and that most of them ran a cash flow analysis taking in the payments already going to other finance providers. That is worth knowing, because it means the second and third facilities were not written in ignorance of the first. They were sized against an account that was already carrying it.

Holding more than one facility is not, on its own, a breach of anything — the same report noted that the vast majority of Australian businesses have several sources of credit. What changes when the facilities are cash flow loans is that they all draw on the same account, every day or every week, and very often they are all secured over the same assets.

You are not the first one this week

Most people holding a stack try their bank first, and the bank says no. Not because the loan would not be repaid, but because the statements now show three lenders' debits leaving every morning, the credit file shows the enquiries that came with them, and there are registrations against the company that the bank's credit team reads as somebody else's security. Those are the things a bank exists to care about. None of them says anything about whether there is equity in the building.

That gap is where HomeSec has been since 2004. We are not here to judge how the stack built up — it is one of the situations we see most, which is also why we write about business loans for borrowers with bad credit. What we look at is whether there is enough unused equity in real property and whether the purpose is a genuine business one: not financials, not a credit score, not whether everything is up to date, and no interrogation about the last two years. From a clean, complete scenario funds can be available in as little as 24 hours, and interest can be capitalised for up to six months, so the business is not replacing three daily debits with a new repayment the week after settlement.

Back to the stack, because the order those facilities sit in is the first thing to understand.

The order they sit in on the register

Most cash flow lenders that take security take it the same way: a general security agreement, which the AFIA Finance Industry Code describes as creating a security interest in the business's present and future assets, registered on the Personal Property Securities Register. Three lenders, three registrations, very often over exactly the same thing — everything the company owns now and everything it acquires later.

The register's own rule for ranking them is short: where there is more than one perfected interest, priority runs from the earliest registration date to the latest. So the first lender to register usually ranks ahead of the second, and the second ahead of the third. The main exception the register names is a purchase money security interest — finance used to buy a particular asset, such as a vehicle or a piece of equipment — which can rank ahead of an earlier general registration over that asset.

That ranking is what the later lenders priced in, and it is what any new lender will read first. The ASBFEO report put the practical consequence plainly: broad all-asset security held by an existing lender can block new lending, and businesses "may at times be unaware of the implications until they approach new lenders". A search of the register by the company's ACN shows every registration and its date — how to run one, and what it costs, is set out in getting out of a merchant cash advance, and is not repeated here.

What a default on one does to the others

This is the part of a stack that nobody explains, and it is why three manageable facilities can become one unmanageable one inside a week.

Each facility agreement carries its own list of events of default, and nothing requires the lists to be limited to that facility. Some reach outward, to things that happen under other finance. A bank that subscribes to the Banking Code of Practice, for example, may act on a non-payment default only on a closed list of grounds — and another creditor's enforcement proceedings is one of them. A non-bank lender's contract sets its own grounds, and the Finance Industry Code leaves the enforcement approach for a non-monetary default to the loan terms themselves.

So the honest answer to "if I miss a payment on one, what happens to the others?" is: read the contracts, side by side. Find the events-of-default clause in each, and look for any reference to other indebtedness, other financiers, other security or enforcement by anyone else. Where those words appear, a dishonour under the third facility is not a problem with the third facility. It is a problem with all of them.

Two other clauses are worth finding in the same sitting. The ASBFEO report noted that some lenders want a competitor's debt bought out before they will lend, and that this is not always possible where existing loans carry lock-in or termination provisions. Find out whether any facility in the stack has one, and what it costs to end it early, before anybody plans a refinance around it.

Unwinding a stack, in order

1. 1
   List every facility, from the bank's own records.Every debit, every lender, every day of the week it lands. The bank can give you a list of your direct debits and recurring payments going back thirteen months; ask for it first, because the trading names on a statement rarely match the names on the contracts.
2. 2
   Search the register and put the registrations in date order.That is the order of priority. Note any registration you cannot match to a facility you know about — it is either an old one that was never removed, or a facility nobody has mentioned yet.
3. 3
   Read the events-of-default clause in every agreement, together.You are looking for anything that reaches beyond its own facility — other finance, other security, other creditors. That tells you whether a problem with one is a problem with all.
4. 4
   Ask every lender for a written payout figure for the same date.One date, chosen by you, for all of them. Payout figures that settle on different days cannot be cleared at one settlement, and the one that has not been paid keeps debiting while the others are being cleared.
5. 5
   Find any lock-in, termination or early-repayment term.Some facilities cost close to their full amount to clear early, some cost nothing, and a few have terms that make an early exit expensive enough to change the order. All of it belongs in the arithmetic before anyone signs.
6. 6
   Clear them at one settlement, not one at a time.A single settlement pays every lender on the same day, which is the only way all of the debits stop at once — and the only way none of the cross-default clauses gets a chance to bite while the others are still being arranged.
7. 7
   Make sure every registration comes off afterwards.Most lenders remove theirs once paid. If one does not, the register's own process is an amendment demand to the lender, then at least five business days, after which you can ask the Australian Financial Security Authority to assist at no cost, or apply to a court. A registration left behind will be read by the next lender as live security.

What a loan can and cannot do here

It can do the one thing a stack most needs. Where there is unused equity in real property, a single facility secured against it can pay out every lender in the stack on the same day, which stops every debit at once and replaces them with one monthly interest payment — or, with interest capitalised for up to six months, with none at all while the trading recovers. How that settlement is arranged, and which debts are worth clearing first when not everything can be, is covered in consolidating business debt at one settlement.

It cannot make the facilities cheaper retrospectively. Where a cost was fixed at the start, paying it out early may save little of it, and that has to be in the arithmetic. It cannot touch a personal guarantee given for any of them, which is a separate promise and stands on its own. And it does not answer why the second and third facilities were needed. If the answer is a genuine timing problem — a slow-paying customer, a seasonal trough, a contract that ran long — clearing the stack fixes it. If the answer is that the business does not make enough money to carry the debt it already has, it does not. How cash flow loans are sized and repaid and what a cash flow lender's decline actually tells you cover the ground before this one, and the separate question of what applying to several lenders at once does to a credit file is answered in whether it is bad to apply for multiple loans at once.

When borrowing is not the answer

Plainly, because a stack is the situation in which another loan is most tempting and most dangerous.

ASIC's instruction to a director of an insolvent company is four words long: do not incur further debt. Consolidating is consistent with that where the new facility clears every lender in the stack, the debits stop, and the business underneath is viable. It is not consistent with it where the stack was how a loss was funded and the loss is still running. Moving three cash flow loans onto the family's property keeps that loss going and puts the house beside the company. If that is the honest position, the call to make is to a registered liquidator about small business restructuring or a winding up, and we will say so on the first call rather than after a valuation.

Three narrower cases where the answer is also no. If the payout figures together exceed what the equity can support, no structure changes the arithmetic, and the better use of the week is a conversation with each lender about varied terms. If one facility in the stack is nearly finished and costs little to run off, leaving it to finish may cost less than paying it out. And if the total is below $20,000 we do not lend to it at all — registering security over a property for an amount that size is the wrong tool for the job. The Small Business Debt Helpline on 1800 413 828 is free, independent and confidential, and it is a reasonable first call in any of the three.

This page explains what loan stacking is, how registered security ranks on the Personal Property Securities Register and what to look for in the agreements. It is general information, not legal or insolvency advice: what to do in your circumstances is a question for a commercial solicitor, a registered liquidator or your accountant. The Australian Small Business and Family Enterprise Ombudsman's 2018 report on fintech lending, the Personal Property Securities Register's own guidance on priority and on disputing a registration, and the AFIA Finance Industry Code of Practice are the primary sources behind everything above. Read your own facility agreements, security agreements and guarantees alongside them.

Reviewed by Matt Hempel, National Credit Manager