Should you borrow more to cover overdue debts?
A quick loan would clear old bills
A roofing business is offered a quick loan after falling behind with suppliers. The funds would clear several overdue invoices, which feels like progress. However, repayments start before customers usually pay and the lender wants a personal guarantee. The owner needs to compare today’s relief with tomorrow’s commitments, not just the speed of approval.
Explain why the debt arose
Separate slow collections from underpriced jobs, overheads and inherited obligations. Borrowing does not itself improve a job that costs more to deliver than it earns. Identify what will change once the money arrives.
Use job results and account records to support the explanation. If the cause remains unclear, investigate before adding debt. A lender’s willingness to advance money is not evidence that the business can afford the resulting payments.
Model every repayment
Add fees, interest and instalments to a dated forecast. Check the result if the largest customer pays later or the next job runs over budget. Cash-flow planning should expose those dependencies before the agreement is signed.
Compare the business with and without the loan. If another borrowing would be needed to meet the first instalments, the proposal may only postpone the wider decision. Include other loans and essential operating expenses rather than reviewing the new payment alone.
Understand the personal exposure
Read the security, guarantee and repayment-trigger provisions. Moneysmart explains that a guarantor may have to repay another person’s loan. Ask a qualified adviser to explain how the proposed business guarantee and any property security operate.
Check payout costs on old facilities and whether they will actually be closed. Combining balances can make administration simpler while increasing total cost or extending the time the household remains exposed. Obtain the complete terms in writing.
Compare alternatives
Consider collection of accepted invoices, affordable creditor arrangements and reducing commitments where contracts permit. If company debts cannot be met generally, arrange a solvency review rather than treating loan shopping as the only response.
The useful decision is whether there is a credible path after the advance has been spent. Write down the rejected alternatives and reasons as well as the preferred option, so urgency does not hide a cheaper or more sustainable solution.
Test the next loan’s repayments
Identify what caused the arrears and what will change.
Forecast all repayments with a delayed-receipt scenario.
Check total cost, security and guarantees.
Compare borrowing with creditor and restructuring options.
Call CRP today about borrowing to cover arrears and coordinating an independent options review.