Refinancing business debt: untangling stacked short-term loans

It usually starts sensibly. A company takes a short-term loan for stock or a slow month. A few months later, something else comes up and a second lender offers a quick top-up. Then a third. Each one made sense on the day, but together they take a slice of every day’s takings, and suddenly the account that used to feel comfortable is always tight. Refinancing is how you untangle that.

What refinancing business debt actually involves

A refinance replaces existing facilities with a new one. The new lender pays out the old loans at settlement, discharges any security they held and leaves the company with a single repayment. The aims are usually some mix of:

• lower total debits, by spreading the balance over a longer term;
• fewer debits, replacing several daily or weekly debits with one;
• simpler administration, dealing with one lender instead of several;
• removing a risk, such as an ATO debt that could lead to enforcement.

Moneysmart’s guide to debt consolidation and refinancing is written for individuals, but the principles of comparing total cost and avoiding traps apply to companies too.

A worked example of consolidation

Consider an illustrative transport company with three short-term facilities:

Facility	Remaining balance	Current debits
Loan A, daily	$48,000	About $520 per business day
Loan B, weekly	$35,000	About $1,900 per week
Loan C, daily	$22,000	About $310 per business day
Combined	$105,000	About $6,050 per week

At deposits of roughly $95,000 a month, those debits take a heavy share of income. Consolidating the $105,000, plus any payout costs, into a single longer-term facility could reduce the weekly figure substantially. If the directors have property equity, a second mortgage over a longer term can reduce it further, because the lender’s risk is lower and the term can stretch. The exact numbers depend on the offer, so run real quotes through the repayment planner.

How a lender assesses a refinance

From the credit desk, a refinance file raises one question above all: why did the debt build up? Lenders are comfortable refinancing a company that grew quickly and borrowed to keep up. They’re far more cautious with a company that borrowed to cover ongoing losses, because a refinance alone won’t fix that.

Expect the assessor to look at:

1. Statements showing every existing facility and its debits.
2. Accurate payout figures from each current lender, including early repayment costs.
3. Any arrears or dishonours, and why they happened.
4. Whether turnover is stable, growing or falling.
5. What will be different after the refinance, so the company doesn’t restack.

If the account shows serious stress, lenders will lean on property security. Unsecured refinances are possible for healthier files; secured ones reach much further.

Check the cost of getting out

Before you commit, ask every existing lender for a written payout figure valid for a specific date. Some short-term loans charge the full fixed cost even if repaid early; others discount it. That can make a big difference to whether consolidating saves money, and it’s the figure the new lender will need anyway.

Signs it’s time to look at a refinance

Directors are often the last to notice that debt has crept up, because each facility felt manageable when it was taken out. These are the patterns we most often see in statements just before a company asks for help:

• The account dips close to zero before each payroll, even in reasonable trading months.
• More than one lender is debiting daily, and the combined debits are a noticeable share of each day’s takings.
• A new loan was taken in the last few months mainly to keep up with existing repayments.
• Suppliers are being paid later than they used to be, to protect loan debits.
• BAS or super payments have slipped because the account couldn’t cover them on the due date.

Any one of these on its own isn’t a crisis. Two or three together suggest the structure of the debt, not the business itself, has become the problem. That’s exactly the situation a well-designed refinance is meant for, and the earlier it’s addressed the more options there are. Waiting until repayments are being missed narrows the field, because some lenders won’t refinance accounts already in arrears.

Keeping the account clean after a refinance

The most common reason refinanced companies end up back in trouble is restacking: taking new short-term facilities on top of the consolidated loan within months. Agree a simple rule with your co-directors and your accountant before settlement, for example that any new borrowing is discussed with your main lender first. It’s also worth keeping one modest line of credit for genuine surprises, so a one-off gap doesn’t push you back to a quick, expensive top-up.

When refinancing isn’t the answer

Sometimes the debt has grown beyond what any refinance can fix, or the company is no longer trading profitably. In that case, talking to your accountant about restructuring options is wiser than adding a new loan. ASIC’s information on small business restructuring explains one formal pathway. A good lender will tell you if that’s where things stand; we’d rather say so than lend into a problem.

Get your repayments back under control

If your company is juggling several facilities, tell us what’s running and what each one costs. We’ll show you whether a consolidation, with or without property, would bring the account back to a sustainable footing. There’s no credit check when you enquire through our 60-second form, your enquiry isn’t passed around a crowd of lenders, and a real person will go through the numbers with you. Listing every current loan accurately is the most useful thing you can do. Ask about a refinance.