Business Loans & Tax Debts (A Private Lending Case Study)
Nothing is more painful for a business than when it urgently needs funds and is unable to get access to money. Matters only get worse when the business has a tax debt and is unable to extend current banking facilities. This lack of credit availability is often what causes businesses to collapse, but it is also the area where private lending helps businesses to thrive.
The main issue we have seen, is not that businesses aren’t profitable (on paper they are), it’s that their free cash flow position is poor, in other words they don’t have enough liquid cash.
Add to the mix the incompetence of professional “advisors”, economic conditions or poor management decisions, businesses can quickly collapse if they do not have access to timely funds (read when to use private lending here).
One of our clients has a very successful construction business but had a poor working capital balance due to Covid-19, as debtors were late in payments and a short-term decline in revenues. The client also had tax debts, which was a large roadblock to getting any source of traditional funding.
The client required an immediate working capital solution to be delivered within the fortnight for a few million dollars. Despite short term constraints, his overall long-term situation was positive, the client also had sufficient equity in his properties and above all was of good character.
Like many of our clients that we service in private lending, they were asset rich but cash flow poor.
Engineering A Solution
Time: The client required an immediate funding solution within two weeks.
Pricing: The client was rate sensitive, meaning he was accustomed to bank rates and didn’t wish to pay double-digit figures on any additional capital that came either in the form of a second mortgage loan or caveat loan.
Calculations: We provided the client with rates of first mortgage loans (refinance of existing facility plus working capital) versus second mortgage rates and caveat loan rates. We also presented the legal issues and process difficulties of each (as with second mortgage loan banks must provide a deed of priority, which can take considerable time).
Solution: The client with his own advisors quickly determined that given how low our first mortgage rates were and our flexible terms, he would be better off refinancing through us whilst getting the additional working capital he required.
Key features of the loan: We specified a minimum interest only period that the client requested (12 months) and we also gave him the right to extend the loan period for a few years if required, whilst also being able to make principal reductions should he wish.
In an environment where no one wanted to lend the client, we were able to do so. The business is now operating successfully and has a new pipeline of work from which they can grow. Had we not delivered a timely solution, the client’s business would have been at critical risk of shutting down.