It is important that small businesses and their advisors are alert to the cashflow impact of the new insolvency laws that come into play from January 1.
Directors and their advisors are encouraged to act immediately so they don’t risk trading insolvent when the legislation takes effect, and don’t exacerbate existing cash flow problems, according to national SME funder ScotPac.
ScotPac senior executive Craig Michie said small businesses who may have to restructure in 2021 would be wise to put in place arrangements that secure the working capital they’ll need to deal with tighter supplier credit terms, a likely flow-on effect of the restructuring model.
Restructuring will create cashflow tensions
Mr Michie said securing funding will be a key requirement of the streamlined SME restructuring process that after December 31 replaces “COVID Safe Harbour” insolvency rules (which during the pandemic year absolved directors of personal liability if their businesses traded while insolvent).
Under the new rules, from January 1 SMEs with liabilities under $1 million, and who are up to date with their tax lodgements and up to date with employee entitlements that are due and payable such as wages and superannuation, can work with an expert to restructure. Under this new system owners are able to stay in charge of running the business while experts (the new Small Business Restructuring Advisors) work on a turnaround plan to put to creditors.
“It’s important for directors and their advisors to know they can lodge with ASIC an intent to enter into the new arrangement within three months. This effectively safeguards them from the implications of trading insolvently while the arrangement is put in place,” Mr Michie said.
“However, the obvious cashflow challenge with this arrangement is that suppliers become aware of the intent and withdraw credit altogether or apply “cash on delivery” terms.
“Accessing the cash tied up in an unencumbered receivables ledger that generates cash to bridge this gap is a logical step for small business directors and their advisors to consider.”
Many directors unaware of impact of new rules
There is likely to be a surge of businesses experiencing difficulties and requiring turnaround funding in the first half of 2021, especially once government stimulus measures such as JobKeeper end and protective measures around statutory demands and winding up petitions are withdrawn.
Hall Chadwick Insolvency & Reconstruction partner Blair Pleash said businesses can be restructured formally (Voluntary Administration or creditors voluntary winding up) or may be eligible for the new debtor-in-possession model which opens up restructuring to SMEs for whom VA costs would be too prohibitive.
“There are a lot of businesses affected by COVID who in early 2020 could not imagine they would be in this scenario. We are dealing with a new cohort of directors who had never contemplated insolvency and they need considered advice – sooner rather than later,” Mr Pleash said.
“Directors should review their position as soon as possible as there is a lot in play – once support and protection measures are withdrawn, will they have sufficient cashflow? If not, they need to consider restructuring.”
Mr Pleash said most SME directors are not fully aware that cash flow problems may be exacerbated by taking up the new restructuring option unless they can access sufficient funding throughout the restructuring process and into the future.
The cash flow squeeze that could happen under the new debtor-in-possession rules may make a struggling SMEs’ cashflow situation even worse unless they take steps to address the issue, he said. This may include putting in place financial products such as invoice finance.
“Get the right advice and have the tough conversations as soon as possible about restructuring and the funding it will require, because dealing with it early gives you more options,” he said.
Funding suitable to restructure a business
ScotPac’s Craig Michie said the ATO, banks, landlords and suppliers are going to be able to take more direct enforcement action from January 1 2021 when pre-COVID rules are restored.
Mr Michie said directors and their advisors must be aware of the option of accessing their accounts receivables to solve not only their original cashflow concerns but also the cashflow issues caused by the restructuring process.
“It’s important for insolvency practitioners, accountants, brokers and others who advise SMEs to be aware of the lending options available to small businesses as they undertake restructuring.
“Funding that is fast and without red tape will be crucial as these restructuring plans are put in place. This is where funding products such as invoice finance will be in demand, ensuring that businesses undergoing restructuring have adequate cashflow to see them through.
“Even if a small business is not at the crisis point now, taking action now or early in the new year to get in place this style of funding means it is ready to draw down from, if and when the need arises.
“There are funding products available where the business is only charged when they draw down. It makes sense to have such a facility in place so it can be accessed quickly if required,” Mr Michie said.
ScotPac’s FactorONE product is a lending solution suited for this environment, providing access to funds within 48 hours, and a low-document application process, with no property security required.
There is also the aspect of scale – unlike many small business funders, ScotPac has the ability to lend higher limits (over $2 million) to businesses that meet the criteria, along with the trust and reliability that comes with ScotPac having funded the Australian small business sector for more than 30 years.
“Advisors have an important role to play in helping their small business clients get the right funding in place now so they can move swiftly if they need to restructure in 2021. Having systems in place now will give them the best chance of turnaround success,” Mr Michie said.
ScotPac is Australia and New Zealand’s largest non-bank SME lender, and for more than 30 years has helped thousands of business owners with the working capital they need to succeed. ScotPac lends to small, medium and large businesses from start-ups to enterprises with revenues of more than $1 billion.
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