Secured loans in a business turnaround

When a business needs time

Turnarounds start with a recognition that something has gone wrong. Perhaps a major customer left, costs rose faster than prices, a project ran over budget or rapid growth outpaced cash flow. Debts pile up, creditors become impatient and the ATO begins to escalate. The business may still have a solid core, but it needs time and breathing space to fix what is broken.

A property-secured loan can provide that space. By clearing the most dangerous debts and stabilising cash flow, it lets management focus on the turnaround instead of fighting fires. But borrowing only helps if the business can genuinely recover.

Start with an honest diagnosis

Before borrowing, answer some hard questions. Is the business profitable at its core once one-off problems are removed? What caused the decline, and has that cause been addressed? What specific changes will restore profitability, and how quickly? What happens if those changes take longer than planned?

An accountant or turnaround adviser can help you answer these objectively. If the honest answer is that the business is losing money with no clear path back, borrowing against property may simply put the property at risk while delaying the inevitable.

Directors’ duties

Company directors have a duty to prevent the company from trading while insolvent. If there are doubts about solvency, get advice from an accountant or registered liquidator before taking on new debt. Options may include safe harbour protections while a better outcome is pursued, a small business restructuring process or other formal arrangements. A secured loan can sometimes form part of these plans, but advice should come first. ASIC’s information for directors is a useful starting point.

What a loan can achieve

Used well, a secured loan in a turnaround can:

• Clear tax debts before director penalty notices create personal liability
• Pay out a creditor who has issued a statutory demand, preventing a winding-up application
• Settle supplier arrears so supply continues
• Fund the costs of restructuring, such as redundancies or relocating to cheaper premises
• Provide working capital while new sales or contracts build up

The aim is to remove existential threats and create a stable platform for the changes that will restore profitability.

What lenders look for

A private secured lender will focus on the property, the total debt and the exit. In a turnaround, lenders also want to see a written plan explaining the problem, the changes and the expected timeline. They will want to know which debts the loan will clear and that the business will be able to keep up with new obligations, such as current BAS and wages, going forward. Interest can often be prepaid or capitalised, removing repayments during the most difficult months.

Common exits

Turnaround loans are commonly repaid by refinancing once the business has several months of improved trading, selling a non-core asset or property, selling part or all of the business, or a capital injection from a new partner. Choose a term long enough for the turnaround to show results, plus a buffer.

Warning signs that borrowing will not help

Be cautious if the business has lost money for several years, if the cause of the losses has not been identified or fixed, if new debts are building faster than old ones are being cleared, or if the plan depends entirely on one uncertain event. In these situations, discuss formal options with an adviser before putting property at risk.

Illustrative example

A manufacturer lost its largest customer and fell behind on tax and suppliers. After cutting costs and securing two new contracts, the core business was profitable again, but a director penalty notice and supplier pressure threatened to derail the recovery. The directors, with their accountant’s support, took a twelve-month loan secured over a factory they owned, clearing the ATO debt and supplier arrears. Interest was capitalised. After nine months of improved trading, they refinanced to a bank facility.

This example is illustrative only.

Building the turnaround plan

A good turnaround plan does not need to be long. It should explain in plain terms what went wrong, what has already changed, what will change next and how you will measure progress. Include a thirteen-week cash flow forecast showing how the business meets current obligations once the old debts are cleared, and a simple twelve-month outlook. Name the people responsible for each change, including any outside advisers.

Share the plan with your accountant before you share it with a lender. An adviser who has tested the numbers adds credibility, and their questions often expose weak assumptions that are better fixed early. Lenders see many plans that rely on optimistic sales growth; plans built on cost savings already made and contracts already signed carry far more weight.

Communicating with creditors and staff

Turnarounds succeed or fail partly on trust. Once funding is in place, tell key suppliers that arrears are being cleared and explain the new payment arrangements. Keep the ATO informed and make sure new lodgements and payments are on time. Staff will sense pressure, so a brief, honest update about the plan can protect morale and keep good people. Customers rarely need detail, but they do need reliable delivery while the changes take effect.

Monitoring progress during the loan

Review the cash flow forecast against actual results every month. If results fall behind, act early: cut further costs, adjust the plan or talk to the lender about the exit timing. A lender that hears about problems months before maturity has far more options than one that hears on the due date.

Getting started

If your business has a viable core and needs time to recover, check your eligibility with no credit check. Tell us about the property, the debts that need clearing and your plan, and we will explain what may be possible.

Start your enquiry in confidence.