Understanding when and how to use business borrowing

Boxers & Briefs Podcast #10: Getting out of business debt with Adam Day

Adam Day, Mortgage Advisor at Personalised Mortgages, brings extensive experience in both UK and New Zealand banking to help demystify the complex world of business debt. Since 2009, he has been helping people navigate property and commercial lending, drawing on his background in corporate banking during the Global Financial Crisis.

“Have a plan,” says Adam, emphasising that while many businesses find themselves in debt without planning, getting out of it requires careful strategy. This means working with advisers, accountants, lawyers, and banking professionals to create a structured approach to debt management.

Understanding good versus bad debt

Not all business debt is created equal. Adam explains that ‘good debt’ has a clear purpose and is properly structured. For example:

• Commercial property purchase rather than leasing
• Asset finance for essential equipment
• Working capital for specific growth projects

Conversely, ‘bad debt’ often stems from poor structuring or misuse of financial tools. Common examples include:

• Using overdrafts in ‘hardcore’ (permanently drawn down)
• Mismatching loan terms with asset lifespans
• Unstructured use of credit facilities

The dangers of avoiding communication

“Most people who get themselves in real problems is because they just put their head in the sand,” Adam notes. This is particularly problematic with tax debt, where many businesses avoid communicating with the IRD. He emphasises that organisations like the IRD can be surprisingly accommodating when businesses are upfront and honest about their situation.

Refinancing: solution or trap?

While debt consolidation can seem attractive, Adam cautions against quick fixes. Moving to lower-tier lenders might provide temporary relief but can lead to spiralling problems. “Businesses do that so they’ll go to their lender and get an overdraft… but then they draw down the overdraft and then they’re in a worse position than they were because they’re also paying 15-20% interest.”

Knowing when to borrow

On the question of when to take on debt for growth, Adam emphasises that timing isn’t as important as purpose. “There’s no right time, there are definitely wrong times,” he explains. The key is having a genuine need rather than just a want. Valid reasons might include:

• Acquiring essential assets for new contracts
• Purchasing commercial property for business stability
• Funding specific innovation projects
• Supporting strategic expansion

Adam reminds business owners that debt isn’t the only way to fund growth. “You don’t need to borrow, you don’t need to create debt. You could offer equity in your business, get an equity investor in,” he suggests. Business angels and investors can bring not just capital but valuable experience to help guide growth.

Protecting against worst-case scenarios

Adam shares a sobering story about the importance of proper business protection. It involves a business-to-customer company that required significant working capital to fund production of units from China. The business had an unsecured facility of $1.2 million, backed by the owner’s personal guarantee. When the owner unexpectedly passed away, the debt passed to his estate, leaving his three children in an extremely challenging position.

“They had inherited a good business but with significant debts,” Adam explains. The children, one of whom lived overseas, had no involvement in or understanding of the business. Working with the bank and a major accounting firm, the family spent nine stressful months trying to resolve the situation. Ultimately, they had to sell the business and each contribute personally to cover the remaining debt.

The situation could have been avoided. “Unfortunately, despite the advice that the business owner was given, he didn’t take out any insurance,” Adam notes. While key person insurance would have been expensive due to the owner’s age, it would have protected his family from inheriting such significant obligations.

This real-world example highlights the importance of:

• Having appropriate insurance coverage
• Understanding personal guarantees
• Protecting business continuity
• Planning for succession

The future of business lending

Looking ahead, Adam sees significant changes coming to New Zealand’s lending landscape through open banking. This system, already transforming the UK market, allows secure sharing of banking information between institutions, potentially leading to:

• Faster lending decisions
• More diverse lending options
• Real-time financial assessment
• Increased competition in the lending market

For businesses considering taking on debt, Adam recommends:

1. Have a clear purpose for the borrowing
2. Understand the difference between needs and wants
3. Consider all funding options, including equity
4. Ensure loan structures match asset lifespans
5. Maintain open communication with lenders and creditors
6. Seek professional advice early

The key to successful business borrowing lies in strategic planning and clear purpose. As Adam emphasises, debt can be a powerful tool for growth when used correctly, but it requires careful consideration and professional guidance to ensure it serves rather than hinders business success.