The Rise of Cash Flow Loans
We have witnessed the rapid rise of short-term lenders, lending on cash flow. These loans tend to signal the end, rather than the start of the business lifecycle. We see these options as being a six-month indicator for the business to completely fail.
Businesses that are equally relying upon short term financing for regular customers are facing similar issues. With rising default rates on consumer debt, this aspect of a business will be problematic into the future.
Spending time with accountants, we have seen an uptick in analysis that focuses on the cash flow and funding aspects of the business as an indicator of concerns for the business. These conversations are becoming more common and reflect the trusted role of the accountant to produce this information and to have the conversation with the client much earlier than in the past. It has been an active approach to cash flow and cash flow management that has, in our opinion, worked in the favour of businesses that have adopted change early.
The question of why you are borrowing money can provide a significant insight. When the answer is “to get the ATO off my back”, it’s time to seek help.
Reasons for Increased Cash Flow Lending
A troubling trend has developed in Australia. On average, invoices are serviced 26.4 days late beating out Mexico (18.6 days) for the world’s longest overdue rate. This concerning statistic shows a need for businesses to review their invoicing architecture and if necessary, spur corrective action.
We also found that concerns over single touch payroll increased in the second half of the year as the reality of constant cash flow pressure will place some businesses at risk. We expect that the first two quarters of 2020 will bring some businesses closer to the edge and may further spur the trend of cash flow loans.
Getting Trapped in a Debt Cycle
As with payday loans for consumers, businesses can easily get caught in a cycle of mounting debt with fewer and fewer resources to pay it off. We’ve seen owners ending up paying up to $6,000 per month on top of their existing obligations. This is a major financial strain, and cash flow loans generally offer very little flexibility with the terms of the loan. For many, these high-interest loans quickly become an insurmountable burden.
What’s happening right now with small business loans seems to be following a familiar pattern of lenders selling debt to borrowers who can’t afford it. Over the course of our extensive history in restructure and business consulting, we’ve seen time and time again that a quick fix usually just leads to more problems down the track. If your business is struggling with cash-flow issues, the best solution is to address the structural issues within the business in order to provide a long-term solution to intrinsic issues.
If you’re using cash flow loans to cover temporary shortfalls, or you’ve found yourself trapped in an unsustainable debt cycle, your best option is to talk to a trusted advisor for further guidance and support.