Unlocking capital: Is your balance sheet structured for what comes next?

A strong business can still have an inefficient balance sheet. Funding structures often evolve incrementally as businesses grow, acquire assets and respond to changing needs. Reviewing the whole capital structure from time to time can identify opportunities to improve liquidity, flexibility and growth capacity, without simply increasing leverage.

Could your capital structure be working harder?

For many established businesses, today's funding structure reflects a series of decisions made over many years. A property was acquired. Shareholders provided capital for an expansion. An overdraft supported working capital. Equipment finance was added as the business grew.

Each decision may have been appropriate at the time, but is the combined structure still right for the business today? That is the central question in balance-sheet optimisation. It’s not "How much can we borrow?" It’s "Are our capital, debt and assets structured efficiently for where the business is going?"

Start with the whole balance sheet

An effective review considers the relationship between assets, earnings, cash flow, debt and shareholder capital. Key considerations include sustainable leverage, debt-service capacity, security, facility tenor, amortisation, covenants, working capital headroom, interest costs and fees, shareholder objectives and future funding requirements.

Importantly, the lowest interest rate is not necessarily the best funding outcome. A facility offering greater capacity, more appropriate amortisation, better security arrangements or greater flexibility may ultimately be more valuable than one priced marginally lower.

Equally, optimisation does not automatically mean more debt. For some businesses, the right answer may be to retain the existing structure, reduce leverage or preserve borrowing capacity for future opportunities.

Is capital unnecessarily tied up in property?

Established businesses can accumulate substantial equity in commercial property and other assets as values increase and debt amortises. That equity strengthens the balance sheet, but it’s worth asking whether all of it needs to remain tied up.

In appropriate circumstances, reviewing how property is financed may create additional funding capacity for expansion, acquisitions, investment elsewhere in the business or shareholder objectives.

The availability of asset backing, however, does not make additional borrowing appropriate. Any increase in debt should be considered against cash flow resilience, servicing capacity and the business's broader strategy.

Are shareholder loans still the right capital?

Shareholder funding often plays an important role during a business's earlier years, an acquisition or a period of rapid growth. But circumstances change.

A business that now has a strong earnings record, mature operations and a more substantial balance sheet may be able to refinance some of its historical shareholder funding externally.

That could potentially return capital to shareholders or allow it to be redeployed. But it needs to make commercial sense for the business and should be considered alongside affordability, liquidity and relevant tax, legal and corporate considerations.

Does working capital have room to grow?

Growth consumes cash. Higher revenue can mean more inventory, receivables, and work in progress well before the associated cash is collected. Acquisitions, seasonality and changes in supplier or customer terms can create similar pressure.

A working-capital facility established several years ago may therefore be inadequate for today's business, even where profitability has improved.

A useful question is not simply "Do we have enough liquidity to cover today’s requirements?" but "Do we have enough headroom for our next stage of growth, or for an unexpected event?"

Match debt to the assets and cash flows

Not every funding requirement needs to sit against property. Debtor or invoice finance can link funding to eligible receivables, and asset finance can align borrowings for vehicles, plant and equipment over their useful lives.

For the right business, these facilities can complement traditional term loan funding and reduce the need to use the same property security for every requirement.

The trade-offs also matter. Different facilities bring different pricing, documentation, reporting and security requirements. The objective should be to select funding that fits the underlying assets and cash flows, rather than accumulating products in isolation.

Should property and operating debt be separated?

Property and operating businesses often have different funding characteristics.

Property is a long-lived asset. An operating business may require flexible working capital, equipment finance, acquisition capacity and facilities capable of responding to changing trading conditions.

Separating these exposures can sometimes provide greater transparency and flexibility, and allow each requirement to be considered on its own merits.

However, different facilities and lenders can also introduce complexity. The structure must deliver a genuine commercial benefit.

Is one lender still enough?

A strong banking relationship is valuable. But as a business grows, relying entirely on a single funding provider may not always deliver the optimal combination of products, capacity and flexibility.

Different lenders have different appetites and capabilities. Introducing a second provider can, in appropriate circumstances, broaden funding options and reduce dependence on one source of capital.

Again, diversification is not an end in itself. Multiple lenders can mean additional reporting, documentation and security complexity.

The objective is appropriate diversification, not complexity for its own sake.

Questions to ask about your capital structure

• Does our debt structure reflect the business we are today?
• Are we using the right assets to support the right debt facilities?
• Is capital unnecessarily tied up in the balance sheet?
• Do facility tenor and repayments align with the assets and cash flows they fund?
• Do we have sufficient working-capital headroom for growth and volatility?
• Are historical shareholder loans still appropriate?
• Will our current funding structure support our strategy over the next three to five years?

What might optimisation look like?

Consider an established Australian manufacturing and distribution business. It owns its premises, which have accumulated significant equity. Shareholders provided loans during an earlier expansion, working capital is funded through an overdraft, while equipment has progressively been financed through the same banking relationship.

There may be nothing inherently wrong with that structure. But a whole-of-balance-sheet review might identify alternatives: financing the property separately, establishing a working-capital facility more closely aligned with operating requirements, matching equipment debt to asset lives, refinancing some historical shareholder funding or introducing a second lender where commercially appropriate.

The outcome might not produce a lower interest rate. Nor should the objective necessarily be more debt. The value may instead come from better liquidity, improved alignment of debt with assets and cash flows, greater flexibility, diversification and additional capacity for future plans.

Similar principles can apply where owners are considering succession, shareholder exits, distributions or ownership restructuring. Debt can sometimes form part of those strategies, but only where servicing capacity, resilience and the broader tax, legal and corporate implications have been properly considered.

The role of an independent debt adviser

A capital-structure review should start with the business, not the lender. An independent debt adviser can help shareholders, management and those charged with governance assess the existing balance sheet and facilities, borrowing capacity and debt serviceability, then consider alternative structures against the business's objectives.

When a funding strategy has been agreed, assistance may extend to identifying suitable lenders, preparing the information required by the lender(s), creating competitive tension, comparing proposals and negotiating pricing, security, covenants, amortisation and other key terms.

The objective is not simply to introduce a replacement or additional lender, it’s to help clients understand their options and make an informed capital decision.

When is a review worthwhile?

A review can be particularly valuable following significant growth, acquisitions, or asset appreciation, as working capital requirements change, when shareholder loans remain on the balance sheet, or ahead of succession, investment, or a change in ownership. Ideally, it occurs before capital is urgently required.

For owners and directors, the fundamental question is straightforward: is the current combination of debt, equity, liquidity, security and funding relationships appropriate for the business we have today - and the business we want to become?

If your financing structure has not been reviewed for several years, a discussion with your usual adviser or the BDO Debt Advisory team can help determine whether your balance sheet could be working harder.