When borrowing may not solve a business cash flow problem
Updated: 5 days ago
Borrowed money can extend a business’s runway without changing the direction it is travelling.
A business cash flow problem may come from a temporary mismatch between receipts and payments. It may also reflect persistent losses, inadequate margins, excessive commitments or an operating model that does not generate enough cash.
For Australian business owners, the important first step is to investigate the cause. A new loan adds repayment obligations; it does not automatically improve customer collections, pricing or operating performance. This article does not recommend borrowing or avoiding debt in every case.
The short answer
Identify whether the shortfall is temporary, recurring or structural.
Separate trading receipts from borrowing and owner contributions.
Investigate margins, costs, collections and existing commitments.
Test the full cash-flow effect of proposed repayments.
Seek qualified advice promptly where debts cannot be paid when due.
How to investigate a business cash flow problem
Start with current records and a dated cash-flow forecast. Identify what payments cannot be met, when they fall due and why expected receipts are insufficient. A single low bank balance does not explain the whole situation.
Show available cash, actual operating receipts, operating payments and existing finance commitments. Record new borrowing and owner contributions separately so they do not appear to be trading revenue. Include relevant tax and employee obligations using appropriate advice.
Then examine what happens without an assumed new loan. Does the balance recover when an identifiable invoice is paid, or does the deficit continue through successive periods? That comparison helps advisers assess the problem; it is not, on its own, a solvency diagnosis.
A temporary timing gap
A timing gap may occur when a supplier must be paid before a reliable customer receipt is expected. The investigation should establish the amount, expected duration and evidence supporting that receipt.
A customer invoice does not guarantee collection on the planned date. Check delivery, acceptance, payment terms, disputes and the customer’s actual payment behaviour. A forecast should consider what happens if payment is delayed.
A temporary gap can become more difficult if another payment falls due before collections arrive. Include the whole sequence rather than assuming one expected receipt will solve every outstanding obligation.
Seasonal, growth-related and one-off pressure
Seasonal preparation can require stock and wages before peak sales. Growth can increase inventory and receivables faster than cash collections. A repair or other one-off payment can also put pressure on reserves.
These circumstances should still be investigated carefully. More sales do not automatically mean more available cash if margins are low or customers pay slowly. A supposedly one-off cost may signal recurring maintenance or an ongoing capital requirement.
The question is whether the business can generate enough cash after the event or trading cycle to support existing commitments and any new repayments. Labels such as “growth funding” or “seasonal finance” do not establish that capacity.
A recurring deficit is a different problem
If ordinary operations repeatedly consume more cash than they generate, borrowing may postpone the shortfall without removing its cause. Investigate whether pricing, product mix, cost structure, utilisation or customer arrangements need attention.
A persistent cash deficit does not always equal an accounting loss: stock build-up, delayed collections, capital expenditure and debt repayments can affect cash differently. An accountant can distinguish those effects from an unsustainable operating margin.
Do not assume the explanation is simply “we need more working capital”. Describe the actual drivers and whether they are expected to change. A forecast that relies on repeated unapproved borrowing is not evidence that trading has become sustainable.
An illustrative distinction
Imagine Business A has an identified $20,000 payment gap before an expected $40,000 customer receipt. Its advisers still need to investigate collection risk and every other obligation, but there is an identifiable event that may change its cash position.
Business B receives $25,000 a month from customers and pays $35,000 in recurring operating cash costs. Assume, for this simplified illustration, no change in those receipts or costs. It has an operating cash deficit of $10,000 each month.
Adding $30,000 of borrowed cash would cover three months of that operating deficit before interest, new repayments and any other commitments. It would not change the underlying monthly difference. Actual runway could be shorter once those obligations are included.
These examples are hypothetical and incomplete, not recommendations or assessments of real businesses. They show why the same requested loan amount can represent very different funding questions.
Investigate operating performance before treating debt as the answer
Pricing: Do realised prices cover the relevant costs?
Margins: Are discounts, waste or supplier increases eroding cash generation?
Collections: Are invoices overdue, disputed or issued late?
Inventory: Is cash tied up in stock that is not moving?
Expenditure: Which commitments are necessary, flexible or contractually fixed?
Capacity: Can the business deliver forecast sales with available people and systems?
Operational improvements need realistic assumptions. Increasing prices can affect demand; reducing staff can affect delivery; reducing stock can affect availability. Have qualified advisers investigate the consequences rather than inserting an unsupported saving into the forecast.
Changing payment terms or expenditure commitments may require agreement or legal advice. Do not assume the business can simply delay wages, tax or supplier payments to make a repayment schedule fit.
Test additional repayments, not just the initial advance
A new advance improves the bank balance initially, but interest, fees and principal repayments can create later pressure. Model the actual proposed schedule alongside existing obligations, rather than comparing only the advertised rate.
If repayment is daily or weekly, test dates before customer receipts. If there is a final payment, identify its realistic source. Where funding revolves, examine whether customer collections reduce the balance or whether the limit is continually being replenished by another facility.
Test a downside in which the expected operational improvement is delayed or smaller than planned. If repayment capacity depends on an unconfirmed contract, unexplained sales growth or another future refinance, make that uncertainty explicit.
Repeated refinancing deserves scrutiny
Replacing debt can change payment timing and conditions, but it does not automatically improve the operating model. A lower regular repayment may extend the term or leave more principal outstanding, while new fees can increase total costs.
Investigate why earlier borrowing has not reduced as expected. The cause may be timing, growth, a longer cash cycle or continuing losses. Those explanations require different responses and should not be blurred together.
Avoid treating an available limit as evidence that more borrowing is commercially appropriate. Availability, affordability and suitability for the underlying business problem are separate questions.
Warning signs require prompt professional advice
Where a company may be unable to pay debts when due, obtain appropriately qualified accounting, legal or insolvency advice promptly. Do not rely on a blog article or a pending finance application to determine whether it can lawfully incur further debt.
ASIC identifies warning signs including ongoing losses, overdue creditors, poor records and overdue tax or superannuation liabilities. A warning sign is a reason for investigation, not a diagnosis made by this article.
Company directors have obligations concerning insolvent trading. If insolvency is suspected, seek specialist advice before adding commitments or relying on a hoped-for future sale. The appropriate options and legal position need an individual assessment.
Business structures and personal obligations differ. Sole traders, partners, directors and guarantors should obtain advice relevant to their own position. A personal contribution or guarantee can have significant consequences and should not be treated as a routine balancing entry.
What a useful investigation pack contains
Current management accounts and available historical statements.
Bank records that reconcile with customer receipts and payments.
A complete schedule of debts and repayment commitments.
Customer and supplier balances, with overdue items identified.
Tax and employee obligations and relevant payment arrangements.
A realistic forecast with financing shown separately.
Evidence supporting proposed changes and downside assumptions.
An organised pack helps advisers investigate the problem without overlooking liabilities or relying on an optimistic summary. If records are incomplete, say so and address the gaps. Incomplete information should not be replaced by assumptions presented as facts.
Separate the existing position from proposed corrective actions. Show when a change is expected to occur, what it may cost and who is responsible. Compare actual results with the plan to determine whether the cause is genuinely being addressed.
The respective roles of advisers
An accountant can investigate trading performance, cash movements and forecasts. A lawyer or specialist insolvency adviser can assess legal obligations where financial difficulty or solvency concerns arise. Operational specialists may help examine pricing, staffing or inventory issues.
A finance broker can investigate lender requirements and possible funding structures. A broker does not replace those advisers, diagnose solvency through a funding discussion or guarantee that a new facility will fix the business.
Lender approval is also not independent confirmation that the operating model is sustainable. Keep the funding decision connected to the broader investigation, including security, guarantees and personal consequences.
Frequently asked questions
Does a low bank balance mean the business is unprofitable?
Not necessarily. Timing, inventory, capital spending and debt repayments can affect cash separately from accounting profit. Investigate the records with an accountant.
Can growth cause cash pressure?
Yes. Stock, labour and customer credit can absorb cash before sales are collected. Test margins and the full cash cycle rather than assuming growth will repay debt.
Does refinancing solve recurring losses?
Not by itself. It may alter payment conditions, but the cause of losses and the combined repayment position still require investigation.
What if overdue obligations keep increasing?
Seek qualified advice promptly. Where insolvency may be involved, specialist accounting and legal advice is important before taking on further commitments.
Should the forecast include hoped-for borrowing?
Show proposed funding separately and identify its approval status. Also examine the position without unapproved funding so the underlying cash requirement remains visible.
The key takeaway
Investigate why cash is short before treating another advance as the solution. A credible assessment distinguishes timing from recurring deficits, tests repayment capacity and addresses underlying operational or legal issues with qualified advisers.
Related Fairlane reading: CASE STUDY: Cash Flow Solution for a High-Volume Shopify Store; CASE STUDY: Trade Finance for a Women’s Fashion Manufacturer; CASE STUDY: Funding to Grow & Protect Profits for a Furniture Business
Investigating a Cash-Flow Shortfall?
Discuss the funding question alongside advice from your accountant.
General information only. This article does not constitute financial, credit, legal, tax, accounting, compliance or valuation advice. Finance is subject to lender approval, eligibility criteria, terms, fees and conditions. Consider obtaining independent professional advice for your circumstances before acting.
