Who we are, and what this page is
Business House Credit is an independent commercial finance broker. We are not Bizcap, we have no relationship with Bizcap, and nothing on this page is endorsed by them. It describes one client engagement, with identifying details changed and figures rounded, as the client’s position was presented to us at the time. Nothing here describes every Bizcap product. It is general information, not advice on your situation.
The situation
The client, an established business with several years of trading behind it, came to us with a Bizcap loan already in place and six months of it left to run. The repayment was $1,200 every business day, about $6,000 a week, taken from the trading account before wages, suppliers or the ATO could be paid.
Two things stood out on the first call. The first was the size of the loan. It was larger than a bank or a prime-tier non-bank lender would have written for this business. That is not unusual in this part of the market: the approval is based on what moves through the account each day rather than on the balance sheet, so the amount can outrun what the business can comfortably service. The second was what that meant on paper. Against its turnover, the business was already carrying more debt than any lender’s serviceability test would allow, before a single new dollar was added.
Why the payout figure was the real problem
Loans like this one are priced with a factor rate rather than an interest rate. Borrow $100,000 at a factor of 1.30 and you owe $130,000 from the first day. There is no reducing balance, and the fee does not shrink because you have been paying it off diligently for four months. We walk through the arithmetic on our merchant cash advance page, and it applies to a daily-repayment business loan just the same.
So the first thing to establish was the payout figure. The figure the client obtained came to roughly the sum of the remaining daily repayments, about $156,000 to clear the account, so paying early saved very little. That is common with loans priced this way, and it is exactly why we tell every client to ask about early payout before they sign. Whoever refinanced this loan would be paying out the principal and most of the fee in full.
That one number is why most lenders said no. Put yourself in the new lender’s position. They are being asked to advance about $156,000 to a business already past its serviceability limit, and a large slice of that money goes to another lender’s fee rather than to anything that helps the business trade. Very few credit teams will do that. The ones that will need to see the file put together in a particular way, which is the part of this story that matters.
The routes out
A business in this position has a small number of real options. In our experience two of them work, and they suit different clients.
Route one: equity in a director’s property
This is the cheapest and simplest exit, and it is the first thing we check every time. Where a director owns property with usable equity, a business facility can be secured against that property with a commercial lender, over a long term, at a rate in the single digits. Some lenders will write these over twenty-five or thirty years.
The difference in weekly cashflow is dramatic. Take the $156,000 payout above and put it on a thirty-year facility at around 8%, an illustrative figure rather than a quote. The repayment is roughly $1,150 a month, or about $265 a week. The business goes from paying $6,000 a week to paying $265 a week, and nothing about its trading has to change for that to happen.
Two things to be honest about. Over thirty years the total interest on that facility is far more than the fee on the original loan, so if you only look at total cost this route loses. That is the wrong way to look at it: the point is that the business survives, and once the pressure is off the client is free to pay the facility down as fast as trading allows. The second is that the property now stands behind a business debt. That is a serious decision, and one to make with your accountant or adviser in the room, not on a phone call with a broker.
The facility we arrange in this situation is a business-purpose loan secured against the property, written by a commercial lender. It is not a home loan.
Route two: a longer term with another lender
Where there is no property, or the directors will not put it forward, the second route is harder but real: refinance the remaining debt with another lender over a longer term. The new lender pays out the existing loan at settlement and the daily debit stops. What replaces it is a smaller repayment, weekly or monthly, over nine to twelve months instead of six.
It costs more in total, and we say that plainly to every client who asks about it. Using the same illustrative numbers: refinance $156,000 over twelve months at a factor of 1.25 and the total repayable is $195,000, about $39,000 more than seeing the current loan out. The weekly repayment, though, falls from around $6,000 to around $3,750. That is $2,250 a week back in the account, which for a business at the edge is the difference between trading through the next quarter and not.
The hard part is finding a lender who will do it. Most will not refinance a facility like this one at all. Among those who will, the approval turns on how the file is put together: the payout in writing, the daily takings set against the new repayment rather than the old one, and a clear account of why the business ended up here and what has changed since. That is where experience across hundreds of deals earns its keep. The lenders who say yes to this are a short list, and the way each of them wants to see it presented is not written down anywhere.
What happened in this case
In this case we took the second route. We placed the file with a lender who would refinance the payout over a longer term, presented on the new repayment rather than the old one, and the new lender paid Bizcap out at settlement. The daily debit stopped that week. The weekly repayment came down to a level the business could carry, which on the illustrative figures above is the difference between $6,000 a week and about $3,750, and the business had the breathing space to trade back towards a position where a cheaper facility becomes possible.
It cost more in total than seeing the original loan out, and the client knew that before signing. That is the trade this route makes, and for this business it was the right one.
Three things not to do
- Do not take a second loan to service the first. It is the most common move and the most damaging one. Two daily debits on one account is how a tight business becomes an insolvent one, and it closes the door on nearly every lender who might have helped. We wrote about why in can I stack multiple lenders?
- Do not stop the direct debits. It is tempting when the account is being drained, and it is the most expensive mistake available. A missed repayment puts the loan in default, and default is what triggers the personal guarantee and, in many contracts, a caveat over the director’s property. Keep paying until the day the new lender settles, and let the new lender pay the old one out directly.
- Do not wait for trading to improve. Every month spent hoping is another month of $6,000 a week. Lenders also read bank statements, and a statement that shows a business acting early is far easier to place than one that shows the pressure building.
What to check before you sign one of these
- Ask, in writing, what an early payout costs. If the answer is the full fixed amount regardless of timing, you are committing to the whole fee on day one, and refinancing later will be expensive or impossible.
- Convert the factor rate to an annual figure. A factor of 1.30 repaid over six months is a fee of 30% for half a year, which is roughly 60% a year. Compare that against what a term loan on the same file would cost.
- Measure the daily debit against what comes in. If the debit is a large share of a normal day’s takings, the loan is being repaid out of margin, and a quiet fortnight will hurt.
- If a bank would have lent you less, ask why. A lender assessing the balance sheet is telling you something about serviceability. A lender assessing daily takings is answering a different question.