Working capital when the credit file is the problem

Working capital finance is priced off whichever of three things a lender can read: the credit file, the turnover, or the security. A file with defaults on it closes the first door and narrows the second, because an unsecured cash flow facility reads the file and the bank statements together. The third door is unaffected — a loan secured against equity in real property is sized from the property.

Three things a lender can read, and only three

Working capital is the least glamorous money a business ever borrows and the most ordinary thing to need. The arithmetic of the gap — what you pay out before you are paid, and for how long — is set out on our page about working capital loans secured by property, and it is the same arithmetic whatever the credit file says.

What changes with the file is who will fund it. Strip the market back and a lender assessing a working capital request has three things it can read, and no fourth. It can read your credit file. It can read your turnover, usually through the bank account. Or it can read your security — equity in a property, which is worth what it is worth regardless of the year the business has had.

A default on the file closes the first of those and narrows the second, because an unsecured facility reads the file and the account together rather than one at a time. It does nothing at all to the third. That is why the same business, in the same week, is declined by one lender and funded by another without a single fact about it having changed — and it is worth understanding before spending a fortnight arguing with the lender that was never going to be the answer.

You are not the first one this week

Most owners in this position ring their bank first, and the bank says no. Not because the loan would not be repaid, but because a working capital request is assessed against the last set of financials and a credit policy with a line in it about listings. Those are the things a bank exists to care about, and 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 a bad quarter went — it is one of the most common things on the files we see, which is why we also 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. 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 nothing is payable while the gap closes.

Back to the gap itself, because where the money comes from is a separate question from why the money is needed.

The gap usually has a name, and you can look it up

A working capital shortage is rarely a mystery. Most of the time it is one or two large customers taking longer to pay than the terms they agreed to, and the business funding the difference out of its own pocket. What almost nobody realises is that for the largest of those customers, how long they actually take is published.

Under the Payment Times Reporting Scheme, a business that is constitutionally covered, carries on an enterprise in Australia and has total annual income above $100 million has to report its payment terms and payment times for small business suppliers. An entity with more than $10 million in income inside a group whose combined income is above $100 million is caught as well. Reporting entities submit two reports a year, each covering a six-month period, and each is due within three months of the end of that period.

Treasury publishes what they report on the Payment Times Reports Register, as a downloadable spreadsheet and an interactive dashboard, and the Regulator says plainly that anyone can use it and that no account or login is needed to search it. Businesses below the thresholds may report voluntarily, and registered charities are exempt. The Regulator also publishes a Small Business Identification tool, which is how a reporting entity works out which of its own suppliers the scheme is about.

Three practical uses, in the order they are worth having.

1. 1
   Check the customer before you chase them.If the register shows a customer's own reported payment times are long, the invoice is not lost and nobody has decided anything about you. That changes the phone call you make, and it changes how much working capital the relationship needs on an ongoing basis.
2. 2
   Size the facility to the real cycle, not the agreed one.A business quoting its terms at 30 days while its two biggest customers report far longer is borrowing against a cycle that does not exist. The number worth funding is the one that actually happens.
3. 3
   Check a prospective customer before you extend them credit.The register is searchable by anyone, which means it works before a relationship starts as well as after. A large contract from a slow payer is a working capital commitment as much as it is revenue.

None of this gets an invoice paid any faster. What it does is replace a feeling that something is wrong with the business with a figure about somebody else's payment behaviour, and the two lead to completely different decisions.

What the unsecured answers register over the business

When the file is the bad part, the working capital products that will still look at a business are generally the ones that take security over the business itself rather than over property. That is a reasonable trade, and it is worth knowing exactly what it involves before signing, because it is the thing that most often complicates the next facility.

Those facilities commonly register a security interest on the Personal Property Securities Register. The PPSR's broadest collateral class is all present and after-acquired property, which covers all personal property over which the grantor has an interest — at the time the registration is made and afterwards. One registration of that class can therefore sit across stock, receivables, plant and equipment at once, including assets the business has not bought yet. The register also carries a version of the same class with exceptions, and separate serial-numbered classes for motor vehicles, watercraft, aircraft and certain intangible property.

Two things follow, and both are practical rather than legal. The first is that the next lender reads the register before it reads you, so what is registered is part of the answer you get from everyone afterwards — how several facilities rank against each other is a question in its own right once there is more than one. The second is that it is worth knowing what is on there now rather than finding out mid-application; getting out of a merchant cash advance sets out the inexpensive search that tells you, alongside the thirteen-month list of direct debits a bank will give a small business on request.

What a secured loan changes, and what it does not

It changes which question is being asked, and nothing else. A lender reading a bank feed and a credit file has only those two things, so a listing carries the whole weight of the decision — what a cash flow lender's decline actually means goes through who is obliged to explain one and what the application leaves behind. A lender secured against real property is sizing the loan from the equity, so the file moves from being the decision to being background.

What it does not change is the arithmetic of the gap. A secured working capital loan is still money that has to be repaid out of the business or out of an exit, and secured against unsecured sets the two side by side on terms rather than on who will say yes. Our range is $20,000 to $5,000,000, interest can be capitalised for up to six months so there is nothing payable while the cycle catches up, and the term is open, so the exit can be a paid invoice, a refinance or a sale when it is ready rather than on a date somebody imposed.

When borrowing is not the answer

Said plainly, because working capital is the easiest loan in the world to talk yourself into.

The test is whether the gap is a timing problem or a margin problem. A timing problem has an end: an invoice with a date on it, a season that turns, a contract that completes. A margin problem does not — if the work costs more to deliver than it sells for, every additional dollar of revenue widens the hole, and a working capital facility simply funds the widening for longer. Borrowing against the family's equity to keep that running is how somebody loses the house as well as the business. ASIC's instruction to a director of an insolvent company is four words long: do not incur further debt.

Three narrower cases where the answer is also no. Where the gap is permanent rather than seasonal — the business simply runs on more working capital than it has, every month of the year — the fix is pricing, terms or scale, and borrowing postpones that conversation at a cost. Where the amount needed is below $20,000 we do not lend to it at all, because registering a security over a property for a figure that size is the wrong tool for the job. And where there is no equity in real property, a secured loan is not our answer either: the useful calls are to your accountant, to a registered liquidator about small business restructuring, or to the Small Business Debt Helpline on 1800 413 828, which is free, independent and confidential.

This page explains how working capital finance is assessed, what a credit listing changes about that assessment, and where the public record of large businesses' payment times can be read. It is general information, not legal, credit or insolvency advice: what to do in your circumstances is a question for your accountant, a commercial solicitor or a registered liquidator. Treasury's Payment Times Reporting Scheme page, the Payment Times Reporting Regulator's own guidance and the Personal Property Securities Register are the primary sources behind every figure above.

Reviewed by Paul Stone, Joint Chief Executive