Are you making smart borrowing decisions for your business? In this essential episode, Darren Vardy examines the true cost of business financing and reveals why easy-access loans can trap struggling businesses. Learn the difference between borrowing for growth versus borrowing to pay old debts, and discover how to identify the root causes of cash flow problems before seeking finance. Understand when equipment leasing makes sense, how to compare financing options, and why the interest rate you pay can be the difference between profit and loss.

KEY TOPICS COVERED:

• The true cost of FinTech and high-interest business loans • Comparing financing options: mortgages, equipment finance, and unsecured loans • Interest rates and their impact on profitability • Borrowing for expansion versus retiring old debt • Identifying root causes of cash flow problems • When short-term financing is appropriate • Equipment financing versus rental decisions • Warning signs of borrowing to cover operational losses • The importance of understanding your break-even position

KEY TAKEAWAYS:

✓ High-interest FinTech loans (20%+ per annum) can be significantly more expensive than traditional financing ✓ Mortgage finance (around 6%) is typically the cheapest option if equity is available ✓ Borrowing to pay old debts doesn't solve underlying cash flow problems ✓ Understanding why you need cash is more important than accessing it quickly ✓ Equipment rental may be more cost-effective than financing for short-term projects ✓ The useful life of equipment and repair costs must factor into financing decisions ✓ Borrowing for salaries and suppliers is a warning sign of poor cash flow management

Who Should Listen: Business owners, company directors, lawyers, accountants, and anyone wanting to understand financial distress warning signs.

About the Host:

Darren Vardy - Managing Director of Insolvency Options and Registered Liquidator with over 30 years of experience in business recovery and debt solutions. Darren has helped thousands of businesses and individuals navigate financial distress and find practical solutions to complex problems.

Connect With Us:

• Website: insolvencyoptions.com.au  • Phone: 1800 463 328 • LinkedIn: https://www.linkedin.com/in/darrenvardy/

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Co-host: Anthony Perl

Produced by: Podcasts Done For You

He explains why borrowing money to pay old debts without addressing root causes only kicks the can down the road and shares strategies for choosing the right type of financing. For your business needs, you'll learn about comparing interest rates, understanding when equipment finance makes sense, versus renting and identifying the real reasons behind cashflow problems before borrowing.

I'm your co-host, Anthony Pearl. Let's dive into unlocking more about insolvency options.

Darren, let's talk a little bit about business financing because. It is something that businesses undertake a fair bit, but do they actually understand it properly and the implications of it in situations where they find themselves not being able to repay it?

You know, the interest payable by the business is a, is an operating expense and where a business is looking to be profitable and to. Turn around. We always look at the various expenses that can be, you know, cut away or shaved down to make it profitable. In recent times and with the advent of a lot of the FinTech loans, we quite often find that these are such loans where business owners have got a cashflow issue.

They're staying up late at night. They're Googling, how do I fix my cashflow? There'll be a number of. Loan providers who say that they're able to provide, you know, unsecured loans for, you know, within 24, 48 hours. Now, one of the real issues with those types of loans is that the interest percentage that the business ultimately pays.

That's leaving aside generally the personal guarantee that the director also provides. So a lot of these loans are high percentage loans north of 20% per annum. And when you compare that to the other loan products on the market or loan types available to a business owner, that can be quite high. The majority of small to medium sized businesses traditionally have been funded out of mortgage findings.

And you know, mortgage rates are. Sitting at around the 6%. Again, a mortgage directors are still personally liable. So if a person has equity to mortgage, my recommendation generally always is look at that as an option, first option, because that will generally be your cheapest form of finance. A business may have some unencumbered equipment, so therefore it may be possible to raise money on a lease buyback type arrangement against that unencumbered equipment.

You know, those equipment loans may be running somewhere between eight and 15%. You know, again, a cheaper form of interest rate to some of those easier access loans that we spoke about earlier. And sometimes the amount of interest paid can be the difference between profit or loss. And because once we find is that it's really easy for.

Where it's really easy for business owners to access cash, certainly a lot harder for them to repay those debts in full, and more often than not, from what I've seen, they are borrowing money because they have a cashflow problem. That business owners may not have actually identified what that cashflow problem is and what is the real reason behind it.

So whilst they've borrowed money to deal with the payment of some of their suppliers and creditors, they've actually not dealt with the root of the problem. And if the root of the problem is dealt with well then that money will go out and all business owners are doing is kicking the can down the road, weeks, maybe months.

End up in a very similar position.

And quite often a business will need access to cash for expansion. Understanding why you need the cash and putting that cash towards something like expansion where you will reap the profitable rewards is as opposed to borrowing cash to retire old debt, which is a very different thing and that's where borrowing cash to retire old debt solves the issue or the debt issue.

It doesn't solve the underlying reason why you need the cash and you know, you need to be looking at, you know, are there some costs? That we need to shave. Are there some unprofitable products that we are selling that we can simply stop selling? Are my customers using me as a bank? You know, are they taking longer than normal trade terms to pay me what I'm owed?

So there are a number of different things that go into what makes up a cashflow issue. It's a matter of identifying and working out how to properly and appropriately address those issues.

Correct. At the same time, you know, the hard part is that these loans that you speak about, these 24 hour loans, they're everywhere and their business owners faces all the time and make it seem like it's easy and it's a great way to solve a problem. And look, in

If a person or a business owner requires some short term cash for say a three month period to run a project through to see the income flow, there is a role for them. In those instances, definitely it's where these funds are actually being used to retire other debt, and we're at the same time as a company trading at a loss.

Where the issue starts to come through to the front.

In. Hindsight's a wonderful thing, and quite often the business owner will say, I didn't realize I had a problem until I had a problem, and the problem that I had was that I couldn't keep up the day repayments of these loans, but realistically, they had a problem before they actually borrowed that money.

I need the money and the relief that you've got the money, and then just charge ahead without taking that time to go back. The issue

Urgent access to cash flow.

Is that part of the problem as well, that there's not a consistency in people understanding what's what and the various options and sometimes there's two or three things that they've taken out.

So you can trade that equipment as you need to, you know, sell, replace, and to build that rapport with. Equipment finance here. If your business issues a lot of invoicing, you know, there's data factoring or invoice discounting, which allows you to bring the cash forward to, then you pay your suppliers and get the product in and out in a quicker manner.

Again, depends on the nature of your business. What we've found with the invoice discounting or the, or the factoring is that whilst you might pay a cost of interest to that is organizations. You often benefit by using the funds to get a discount from your suppliers because you're paying them earlier.

So it's all about what is your business and how you are best to employ the capital, be loans or funds advanced by yourself, how that capital is best employed in your business to maximize its profitability.

And, and all the bits and pieces and options that are in there. And you've gotta balance that out, don't you? To make sure that you're not over financing on something that may not give you quite that extra return, even though you like the options that it might bring. Is it really worth it for the business?

Because the implications are huge.

You're still paying for 'em. You really need to look at, do I buy, do I sell? Do I then once I finish the project, do I then look at offloading this equipment, which then offloads the offloads the loan, and the liability that goes with that. So it's really a matter of making sure you understand your business and not holding onto these items of equipment.

'cause believe it or not, you can actually go back out and buy 'em again if you need 'em for another project. So it's really understanding that project that you are doing. Or projects that you are doing in.

We need this piece of equipment. It'll be great for us in the future. We buy the equipment, and then that project finishes, and now you're forcing yourself almost to be looking for equivalent projects, which may or may not be there. In order to be able to maintain the equipment that you've got, rather than saying, well, maybe we should have factored in from the beginning that we're going to have to sell the equipment at the end of this project, quite possibly, and factor in that there may be a loss associated with that slightly, but that should be part of the equation.

They went overseas and they were going to be driving around for a while and it worked out cheaper for them to go and buy a car, you know, a secondhand car, and at the end of the trip then sell that car again. Didn't sell it for quite as much as they bought it for in the first place, which is fine, but it was less than the rental of the car would've been for three or four months.

Okay. You then need to actually then look at, well, once that equipment is five years old. Because here's the other side of the equation. A lot of businesses hold on the equipment for a lot longer than they should, which leads into a repair and maintenance cost. And sometimes you need to retire the dinosaur and buy a new piece of equipment as opposed to spending the money on the repairs and maintenance of of the business.

So all these things need to be taken into consideration. You know, the useful life of a lot of machinery will be known by the operators. What is that useful life? How am I going to maximize its value? And then what does it look like at the end of its useful life? And am I gonna have enough projects to run that particular item of equipment through to the end of its useful life?

More often than not, it comes down to cashflow management, and if a business owner is looking to borrow money to pay, its day-to-day, week to week, then. Again, that's a warning sign of poor cashflow management. So at that point in time, I would suggest that the breaks need to go on and say, well, we need to deal with the why.

And in dealing with the why, we then borrow the money from the appropriate financier to address the why, which in turn will help pivot that business and get it back into a, hopefully a positive cash flow situation.

Correct. And that's all we have time for in this episode. Next time on IO Insolvency Options. We'll dive into risk management and insurance protecting your business and family. Darren will explain why proper insurance coverage is your first line of defense against business failure, and reveal the critical types of insurance that business owners often overlook.

It's essential listing for business owners. Directors, lawyers and accountants. For details on how to get in touch with Darren and his team on insolvency Challenges, please consult the show notes. This podcast is produced by my team at podcastdoneforyou.com.au helping professionals share their expertise through powerful podcast content.

If you found value in today's episode, please like, comment and subscribe to IO insolvency options. Until next time, remember, there's always a way forward when you know your options.