Second mortgage working capital: funding the gap between costs and cash

What kind of cash gap does a second mortgage suit?

Working capital is the money tied up between spending and earning. A second mortgage suits gaps that are real, measurable and temporary:

• Slow debtors: you invoice on 30 days, customers pay in 60 or 75, and wages are weekly.
• Stock builds: buying ahead of a peak season, a price rise or a big order.
• New contracts: mobilisation costs, materials and labour before the first progress payment.
• Growth: more staff and stock ahead of the revenue they’ll produce.
• Lumpy tax timing: a quarter where BAS, PAYG and super all land in the same fortnight.

What it doesn’t suit is funding persistent losses. If the business is losing money every month, extra working capital just delays the conversation. In that case, business.gov.au’s guidance on financial trouble and a frank chat with your accountant should come first.

How do you size the loan without overborrowing?

Measure the gap in weeks and dollars:

1. List the costs you must pay before the matching income arrives: wages, materials, stock, subcontractors, GST.
2. Estimate how long until that income lands, using your real debtor days, not your invoice terms.
3. Find the peak: the largest shortfall during the cycle.
4. Add a margin for a late payer or a slow month.

That number, not the maximum your property supports, is the right loan size. The equity and LVR calculator then shows how comfortably that amount sits against your equity.

Question	Why it matters
How big is the peak shortfall?	Sets the loan amount
How long until cash returns?	Sets the term
Is the gap one-off or recurring?	Decides between a single advance and an ongoing facility
What happens if a big customer pays late?	Sizes the margin

What structures work for working capital?

• Single advance, short term. Funds a specific gap, such as a contract mobilisation, and is repaid when the contract pays.
• Advance with monthly repayments. Spreads the cost across the cash cycle where income is steady.
• Capitalised or prepaid interest. Protects cash flow in the tightest months; it reduces the equity buffer, so it needs enough room. See the equity buffer.
• Second mortgage now, refinance later. Bridges until financials show the growth and a bank will lend on longer terms.

Need to work out which structure fits your cycle? Send us your numbers and a specialist will talk it through.

What should you fix alongside the loan?

Borrowing solves a timing problem. It’s worth pairing with the cheaper fixes business.gov.au recommends for cash flow: invoice promptly, follow up overdue accounts systematically, consider incentives for early payment, keep stock at sensible levels and check your margins cover your costs. A loan that funds the gap while those changes take hold is a very different proposition from a loan that simply refills the tank.

Lenders notice this too. A business that can explain why the gap exists and what’s being done about it presents a stronger exit plan.

Illustrative example: a contract that pays in arrears

A commercial cleaning company wins a large facilities contract. It must hire and equip twelve staff before the first monthly invoice, which the client pays on 45-day terms. The peak shortfall, including wages, equipment and super, is about $190,000 over roughly ten weeks. The owner’s home is worth about $950,000 with $400,000 owing. A $200,000 second mortgage covers the gap with a margin, at a combined LVR of about 63%. It’s repaid over 18 months from contract income. All numbers are illustrative.

What will a lender ask about your cash cycle?

Expect questions that test whether the gap is what you say it is. A lender will usually want to see recent business bank statements, so it can watch money come in and go out, and your latest BAS to confirm turnover. It may ask for an aged debtors list showing who owes you and for how long, and an aged creditors list showing who you owe. If the gap comes from a new contract, the contract itself and the payment schedule are the best evidence you can give.

None of this needs to be polished. A clear spreadsheet and a straightforward explanation are more persuasive than a glossy forecast. What lenders are looking for is a believable story about when the money comes back, which is also what makes the loan’s exit credible.

When is unsecured working capital a better fit?

If the need is smaller, recurring, or you’d rather not put property on the line, an unsecured cash-flow loan or line of credit may suit. These are typically $5,000 to $500,000, sized on turnover and bank statements, and for smaller amounts same-day funding is possible. The trade-offs are covered in second mortgage vs unsecured business loan.

How does working capital support growth?

The line between working capital and growth capital is blurry. If the gap is caused by expansion, such as a new location, a big client or a new product line, our page on second mortgages for business growth covers how lenders look at funding that grows the business rather than just smoothing it.

Cash tied up in the cycle? Let’s size it properly

A specialist can turn “we’re always a bit short” into a precise number, term and structure in one conversation. The enquiry takes about a minute and involves no credit check when you first enquire.

We don’t forward your enquiry to a list of lenders. A single specialist works through your cash cycle and property, then calls you with options that fit. Please describe the gap honestly, including why it exists, because the more accurate the picture, the better the structure we can put in front of you.

Size my working-capital gap →