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Small businesses are the backbone of the Australian economy, yet many face persistent challenges in accessing finance. When traditional bank loans fall short, fast and flexible funding from non-bank lenders becomes tempting. But behind the marketing lies a complex credit landscape that demands careful consideration—especially when cash flow, personal assets, and business viability are at stake.
The Rise of Non-Bank Lenders and Merchant Cash Advance Providers
Lenders such as Prospa, Bizcap, and Lightspeed Capital have carved a significant niche in the small business finance space. These funders offer quick access to capital with minimal paperwork and often without the red tape of traditional institutions. Products such as merchant cash advances or short-term unsecured loans provide cash flow injections when you need them most. However, this speed comes at a cost.
The True Cost of Non-Bank Lending: A Hypothetical Case Study
Imagine a small retail business taking a $50,000 unsecured loan with a 12-month term from a non-bank lender. The advertised rate may be 2.5% per month, but when annualised (including fees and early repayment penalties), the effective interest rate (EIR) could exceed 40–60% per annum. If sales dip or customer payments delay, the pressure to meet daily or weekly repayments—often required with merchant cash advances—can strain working capital.
The business may find itself trapped in a debt spiral, refinancing high-cost loans with even more expensive credit just to survive.
Secured vs Unsecured Business Loans
- Unsecured Loans: These require no collateral, making them faster to access but riskier and more expensive. They often come with personal guarantees, placing the director’s credit rating and financial future on the line.
- Secured Loans: Backed by business or personal assets (e.g. equipment, vehicles, or even the family home). While they may offer lower interest rates, caveat-backed lenders can move quickly to enforce their security if repayments falter, putting your most valuable personal assets at risk.
The Hidden Dangers of Personal Guarantees and Caveats
Many small business owners overlook the implications of signing a personal guarantee or allowing a lender to place a caveat on personal property. A single default can lead to forced property sales, credit defaults, and bankruptcy proceedings. These are life-altering consequences stemming from what seemed like a routine funding decision.
Cash Flow, Risk, and the Path to Profitability
Before accepting any funding, business owners must assess:
- Cash Flow Impact: Will repayments affect day-to-day operations or payroll?
- Purpose of Finance: Is it for growth (e.g. purchasing stock or equipment), or just plugging a temporary hole?
- Root Cause of Financial Strain: Is the business fundamentally profitable, or is there a deeper issue (e.g. declining margins, overexpansion, or poor financial controls)?
- Viability Assessment: Will the borrowed funds lead to a tangible return on investment or just defer the inevitable?
Fixing the Problem Before Fueling It
Too often, we see businesses take on funding without a clear strategy. For instance, borrowing to cover rent and wages during a slow season might postpone the problem—but doesn’t fix it. Instead, owners must ask:
- Is there a more sustainable solution?
- Can expenses be reduced, pricing adjusted, or operations streamlined?
- Should the business consider a formal turnaround strategy before taking on more debt?
At Rapsey Griffiths, we often see clients after a funding decision has already gone wrong. That’s why we advocate for early intervention, cash flow forecasting, and realistic viability planning—before the money hits the bank account.
Small business funding can be powerful—but only when used strategically. Fast funding without proper planning can escalate into long-term hardship. Understanding the differences between secure and unsecured funding, recognising the personal risk of guarantees, and evaluating whether finance will solve the root issue are critical to long-term success.
Before signing that agreement, speak to a trusted turnaround advisor.