A divorce is inevitably an emotional and stressful time that can have a serious impact on people’s lives – and potentially derail a business at the same time. The business is of course a wealth-creation vehicle for the individual so preserving as much value as possible is a key priority for both.
So it is important for partners to ensure there is a clear plan to help navigate the business through such a turbulent period. Professional advisers such as lawyers, accountants and other financial experts can and should play a key role in helping their clients during this process. Here are some key business factors to consider in the event of a divorce.
Removing personal property as security
In many instances, business owners use their home as security to fund their business. When a personal relationship breaks down, one partner gets the business and the other gets the house – meaning the property is no longer available to secure business borrowings. This can often result in a situation where neither person has sufficient equity to secure the required level of business funding – and both can suffer financial uncertainty. As a result, it is often highly desirable to remove a property as security for a business.
A great option for SMEs
In this instance, it is worth considering a debtor finance facility (also known as invoice finance). Such an unsecured financing option ensures, in effect, that the business is ‘self-funding’. The only security the owners need is the business’s invoices, removing any complications that real estate security could cause. This means working capital can be preserved despite any divorce proceedings, minimising any negative impact on ongoing operations.
The biggest users of debtor finance tend to be small and medium businesses, or start-ups, and these SMEs, because of their reliance on property as security, are most likely to be affected by the financial ramifications of a divorce.
How it works
With a debtor finance facility, the financial institution advances cash against the debtors, which is then used to repay the bank and establish a line of credit for working capital that is not secured by personal property. This decouples the business from the underlying security which allows for the division of property to be more easily managed, and hopefully leading to a faster and less problematic divorce settlement. It also means a business can more quickly resume normal operations, reducing disruption and giving the owner the confidence of superior cash-flow.
Peace of mind
The fallout from a divorce can also lead to other risks for a business, including a resultant lack of focus by business owners on day-to-day management tasks. This is especially true of cash-flow management, while planning for the future often goes by the wayside, too. At the same time, the divorce settlement can result in more payments needing to be made out of the business, leading to lower retained profits.
The security of debtor financing can alleviate some of these concerns and ensure the business stays on a sound financial footing and, if the eventual upshot of the divorce is that the business has to be sold, having funding in place can improve the business’s valuation.
While many business owners may want to put their head in the sand about the repercussions of a divorce, they need to be aware of the risks and put in place a strategy with their advisers to mitigate those risks. Debtor financing should be part of the discussion with their legal, accounting or financial advisors.
Scottish Pacific Business Finance is Australia’s largest specialist provider of working capital solutions, with a comprehensive range of debtor finance and trade finance facilities. More than 90 per cent of all our new clients are referred to us by accountants, banks, commercial finance brokers and other business advisers – an endorsement that highlights our experience and success with SME clients.
For more information on debtor financing solutions, visit www.scotpac.com.au.