How to stop a business debt spiral: seven steps to take before the next loan

Nobody plans a debt spiral. It is built from sensible decisions made one at a time: a short-term loan to cover a slow month, a second to cover a lumpy BAS, a third because the first two take so much out of the account each week. Every step looked reasonable. The sum of them doesn’t.

The way out starts with something unglamorous: knowing exactly what leaves your account, when, and why. This guide is a seven-step sequence for getting that picture, protecting what matters most, and deciding what to do next.

How do you know you’re in a spiral, not just a bad month?

A bad month is a gap that closes. A spiral is a gap that is refilled with new debt, which then widens it. The test is simple: in the last six months, have you borrowed to make a repayment on something you already owed?

Other signs tend to cluster:

• Repayments that debit daily or weekly and leave the account hovering near zero.
• GST or PAYG set aside for the ATO being used to keep lenders quiet.
• Paying suppliers late to pay lenders on time.
• Several lenders with overlapping repayments, none of which you could easily list from memory.
• Using a credit card or an owner’s personal account to cover wages.

Our guide to business loan stacking explains how multiple short facilities interact. The key point: a profitable business can still be in a spiral, because profit is a yearly figure and repayments are a weekly one. When the weekly debits exceed the weekly receipts, the profit and loss won’t warn you. The bank account will.

Step 1: Find the real weekly cash gap

Open the last three months of bank statements and build a table. For each week, list money in, money out, and the closing balance. Then add a column for every loan repayment.

What you are looking for is the number that matters: how much more leaves the account each week than comes in, before any new borrowing. That is the true gap. Everything else is a way to fill or shrink it.

If you don’t have a forecast, build a simple 13-week cash flow forecast, and use the cash flow gap calculator to check the arithmetic. Include tax dates; spirals often break on a BAS due date.

Step 2: List every debt on one page

Make a table with these columns: lender, balance, repayment amount, frequency, total still to repay in dollars, security or guarantee, and what happens if you miss a payment.

Most owners are shocked by two columns. The first is “total still to repay”, which for some short-term products is far larger than the balance. The second is “security”, because it shows which debts put your home or key assets on the line.

Step 3: Rank what must be paid first

Not all debts are equal in consequence. A sensible order, which a financial counsellor can tailor to your case:

1. Wages and super. Staff come first, morally and legally.
2. GST and PAYG withholding. These are amounts you collected or withheld for the ATO. Directors can become personally liable for some unpaid amounts; see what a director penalty notice means.
3. Debts you have personally guaranteed. A default there lands on you, not just the company.
4. Secured debts over assets you need to trade, like the work vehicle or the premises.
5. Everything else, including unsecured loans, suppliers on soft terms and card balances.

This is a priority list for triage, not a licence to ignore anyone. The aim is that if cash runs short, it runs short where the damage is smallest.

Step 4: Tell creditors before you miss a payment

Silence is what turns a manageable problem into a default. A lender who hears early can often offer interest-only for a period, a longer term, or a reset of repayment frequency; one who hears after a missed payment is working from a default process. We cover how to word the request in how to ask a lender for hardship help.

With the ATO, it is the same. A payment plan has to be arranged, and keeping it depends on new obligations being paid on time. See ATO payment plans explained, and note that interest on tax debt has not been tax deductible since 1 July 2025, so leaving it to grow costs you more than it used to.

Step 5: Stop the leaks that make it worse

Before any restructure, shut off what you can:

• Close or freeze spare credit. Open facilities are the quickest way to restart the spiral.
• Look at owner drawings. A temporary cut is not a failure; it is often the cheapest funding you have.
• Cut costs with a deadline. Our guide on cutting business costs fast has a practical list.
• Speed up what you’re owed. Getting customers to pay faster is often worth more per hour than any refinance.
• Don’t take the next fast loan out of panic (or ask us to sanity-check it). How to avoid panic borrowing explains the pressure and how to test an offer before you accept.

Step 6: Decide whether refinancing helps

Refinancing sometimes ends a spiral and sometimes just paints it. The honest test is two questions, answered in dollars:

1. Does the total I’ll repay fall? Not the monthly figure, the total.
2. Does the weekly cash gap close? Meaning the debits fit the money that really arrives.

Here is a worked example, simplified and illustrative. A business has three short-term facilities. Together they have $120,000 still to repay and take $4,000 a week out of the account, while the business generates a spare $3,000 a week before those debits. Every week the account falls $1,000 short, and a fourth loan fills it.

A consolidation that clears all three and replaces them with one facility repaid over a longer term, with $105,000 still to repay and $1,600 a week out of the account, passes both tests. Total falls by $15,000, and the weekly gap becomes a $1,400 surplus. The same consolidation at $130,000 total, stretched so thin that the weekly debit is $1,500, passes the cash test but fails the cost test; you’re comfortable now and poorer later. That may still be right if the alternative is default, but it should be a decision, not a surprise.

Our comparison of refinancing vs debt consolidation and the guide to refinancing out of expensive debt go through the mechanics, and the situations page on stacked online loans shows how lenders view a file like this. If you want to test a scenario, the debt service coverage calculator shows whether earnings cover repayments.

Be wary of any refinance that leaves the old facilities open. A cleared card or line that is then available again is how a second spiral starts.

Step 7: Know when the answer is not more debt

Sometimes the honest answer is that the business is losing money at its current size. Then new funding only delays the reckoning and adds to what you owe. Options then include shrinking the business, selling it, a formal small business restructure, or an orderly close; see closing a business with debts.

This is the point to speak to a free counsellor. The Small Business Debt Helpline (1800 413 828) is independent, doesn’t sell products and can help you with business and personal debts, guarantees, ATO arrangements and closing options, as its website lists. Our guide to free financial counselling for small business tells you what to expect from the call.

If the pressure is affecting how you feel, mental health and money stress for business owners is worth ten minutes.

What mistakes keep spirals going?

• Treating the fourth loan as different from the first three.
• Comparing repayments by the monthly figure when the product debits weekly.
• Paying the loudest creditor first instead of the most consequential.
• Hiding the full picture from a new lender, which tends to surface at the worst moment.
• Waiting for a “good month” to start. A good month is when the first step is cheapest, but it can’t be relied on.

Would a clean, single facility help?

If the numbers pass both tests above, a single, well-matched facility can end a spiral. If they don’t, we will say that too. Either way, enquiring takes about a minute, and your credit file isn’t touched just for asking.

Your details don’t go to a pile of lenders, so your phone won’t light up all week. A real person reads your situation, then calls you to talk it through. Please list your existing debts and repayments as accurately as you can; the more precise the form, the sooner we can tell you whether consolidating is worth doing.

Ask whether one facility could replace several →