Repaying business debt 
too quickly?

By Phil Herbert, general manager, Speirs Finance

Is repaying debt quickly smart thinking, or an old-fashioned notion that is putting significant strain on your cash-flow for little benefit?

With the ever-increasing pressures on businesses of tightening margins, increasing costs, staff retention and needing to invest in technology to improve productivity, competitiveness and to stay relevant, many SMEs are facing cash-flow challenges and are looking for ways to contain costs and conserve cash.

In the face of this, it certainly seems timely to challenge the traditional approach of repaying debt quickly on long life assets and equipment, which has long been promoted by the banking and finance sector – largely because repayment of debt quickly on depreciating assets helped them manage their own risk and made credit decisions easy.

It’s important to work with a funder who implicitly understands your business and its objectives, how you intend to use your asset(s) and then structures finance to be more reflective of their useful economic life. In these more challenging times, businesses need to preserve ‘cash’ to meet the ever-increasing demands arising out of running a business.

If a business is going to employ its assets over a 15-20 year period, then there can be significant challenges to cash-flow in paying debt off over a much shorter term especially if your banker, or lender, won’t then allow you to borrow against equity built up when you need to.

However, there are circumstances where it is appropriate to build equity in your assets quickly – usually where the owner of a business is positioning it for sale and wants to maximise its value and the return on assets.

The limiting factor now, in the philosophy of building equity in your assets, is being able to access a funder who is willing to support you with this. It is important for businesses to be able to access equity for cash-flow or to refinance existing debt to ease cash-flow pressures during tougher times.

The finance sector, since the Global Financial Crisis (GFC), has been dominated by banks who generally see requests for equity release as a warning sign and won’t support it and, thanks to the GFC, there are now fewer finance companies to choose from.

Many finance companies also now favour an online approach to customers that, although may offer convenience, can also be limiting for bigger purchases and provide less (or no) opportunity for a meaningful and knowledgeable conversation about how to best fund assets.

Here are five important questions for any business to consider before committing to any finance structure when acquiring new or restructuring debt for assets:

What is the asset being used for?

What is its useful life – both the real expected life and the useful life as determined by the IRD for depreciation purposes?

What is the cash position of the business?

How much earnings before interest, tax and depreciation is your business generating going forward – as this has to cover all your debt repayments, as well as the flexibility to cover all other outgoings until income arrives each month and meeting any increased costs before you can recover them from your customers (if you can).

What funding options exist?

Which is the most appropriate finance structure for the asset type considering the intended use and lifecycle?

Are you managing your funding risk?

Does one funder control all your assets or business, or have you successfully diversified to reduce or remove this risk? If that funder for any reason gets nervous, it can severely constrict a business which ultimately still has a solid future.

How can funding be structured to maximise cash flow to the business?

This can include equity release on existing assets or using existing assets as additional security to reduce the need for cash being used from the business and ideally sees the asset(s) being cash-flow positive from day one.


NZ businesses commonly acquire used assets, which still have an economic or productive life ahead of them to reduce acquisition cost, but this can present challenges in finding a funder who will provide you with a finance structured the way you’d like.

In any event, given the pressures that now face businesses, wisely choosing funding partners who can meaningfully contribute to your success is becoming more important than ever – to build a sustainable and profitable business.

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