A business loan when cash flow is too low to service one

Why a business with low cash flow gets declined

A bank lending to a business usually starts with serviceability. It takes the last year or two of trading, subtracts the costs, and asks whether what is left covers the new repayments with room to spare. For a steady business that is a sensible question. For one in a dip it is a trap, because the owner who most needs money is often the one whose recent figures look worst: a contract has been won and has to be resourced, the ATO is pressing, or a quiet quarter has just ended. The test reads the dip as the answer.

That is the catch-22 Paul describes: a worthwhile scenario, and not enough cash flow to service the loan that would fix it.

How HomeSec looks at the same file

There is no serviceability test, and as Paul says, no cash flow records or BAS statements to produce. The decision rests on three things instead:

1. Equity in real property. Residential, commercial, rural or vacant land, up to 80% of a residential property's value or 70% of a commercial one, less what is already owed on it.
2. A business purpose. The money is for the business: tax, creditors, stock, a contract, equipment. Not personal spending.
3. An exit. How the loan ends. For a business whose cash flow is down for a reason, that is often a refinance once the figures recover, or money already owed to it.

Credit history is looked at as well, but it is not what the decision turns on. The written guide on whether you need financials for a business loan explains what is asked for instead.

Taking the pressure off while the business recovers

Paul describes it as paying six months of interest in advance. In the published terms, interest can be capitalised for up to 6 months: there are no scheduled repayments in that time, and the interest is added to the loan rather than waived. For a business short of cash that is the point, since a loan meant to ease the pressure should not add a monthly bill to it. The term is open after that, and the loan can be repaid at any time without a penalty.

When it is the wrong answer

The catch-22 Paul means is a timing problem in a sound business. If cash flow is low because each sale loses money, borrowing against property only adds a secured debt to a business that cannot repay it. In that case an accountant, not a lender, is the first call.