Staying ahead of trouble
Operating a successful business requires a resilient growth mindset. However, in a climate of uncertainty, long term success and sustainability can seem onerous for many.
For some, businesses may have inadequate working capital as they experience growth. Sometimes it is merely a case of timing and adverse cash situations can reverse.
In other situations, issues are more systemic or structural and immediate action is needed. Timely action is a critical step.
Debt Restructuring & Remediation
Remediation is always a starting point. There is a need to understand what is happening in the business now. What permanent changes need to occur that will make a sustained future impact. With clarity, a course of action can be determined.
The line between solvent and insolvent trading is a thin one and once crossed, can be hard to reverse. Solutions for business debt restructuring and remediation do exist.
Small business challenges
The 2024 Small Business Conditions Survey, complied by the Australian Commerce of Chamber and Industry (ACCI), reported that 40% per cent of respondents would make a reduced or significantly reduced profit this financial year.
The same survey reveals that in the last twelve months, 45% of small businesses have considered closing nationwide. In Regional Australia, the ratio is almost 60%. There are several key signs that indicate when a business is in trouble and should seek help.
Signs your business is struggling with debt
CPA Australia offers valuable resources for small businesses that may be in distress. It is important to acknowledge that many businesses have debt management issues. Facing this reality head on and immediately is recommended.
Early warning signs of business debt troubles can include:
- Over-committed to inventory and holding too much stock;
- Slow paying customers paying late or negotiating partial payments to creditors;
- A loss of key customers or an increase in refunds; staff morale is low, or staff are leaving;
- Costs are rising faster than revenue, often resulting in the business owner not taking a salary that matches their contribution of time to the business;
- Accounting and ATO compliance are poor or lacking; or
- Credit facilities are at or above limits, and access to new finance has been denied.
Sometimes more debt is not the answer. Remediation measures to consider at this point are:
- Seeking advice from experienced advisers such as a business accountant and commercial finance broker in your area
- Understanding and improving your working capital management
- Initiating workable arrangements with debtors and creditors
- Strengthening your position to seek sustainable levels of debt
Signs your business needs debt remediation
During 2024, credit agency Illion has seen a 20% increase in small firms at risk of not meeting their payable commitments, with terms stretching from 30 days to 60 days (or more) to pay suppliers. Businesses rated as ‘severe risk of failure’ have jumped 80% in the past year. Those flagged at most risk are food services, construction and transport.
There are many factors beyond economic climates that can lead to burdening business debt. These include health issues, natural disasters, disagreements between directors and poor hiring choices. However, it can still be possible to trade out rather than walk out.
Critical signs of business debt distress include:
- Consistently struggling to pay suppliers, wages or rent on time, with amounts accruing rather than decreasing;
- Regularly injecting personal funds into the business to meet wages or secured debt commitments;
- Using cash from new sales to complete older work;
- Dipping into GST, PAYG or Super contribution funds without the ability to replenish; or
- Seeking short-term or low-doc finance with brutal interest rates.
At this point, stronger remediation, such as the Small Business Restructuring Program, may be required. After seeking expert advice, other actions to consider are:
- Significantly reducing overheads and operating expenses;
- Seeking equity contributions from existing or new directors;
- Partial sale of the business; and
- Consolidating and refinancing the debt position to sustainable levels.
Insolvency relief for struggling business
The Australian Government’s Small Business Restructure program was introduced in January 2021 as a post-COVID-19 lifeline for viable trading businesses experiencing burdening debt distress. The Government describes the program as ‘temporary insolvency relief’ that allows owners to remain in control of their business.
A business that meets the eligibility criteria enters a debt restructuring plan with existing unsecured creditors (including ATO debt), usually at a reduced ‘cents in the dollar’ offer. If more than 50% of the value of the creditors pool vote to approve the restructuring proposal, the plan can proceed. Existing debt is siloed while the business continues to trade and rebuild during the debt restructuring period.
Creditors generally support the plan at this stage rather than risk receiving less should the business end up in a liquidation scenario.
The pitfalls of short-term finance
Over-committing to short-term finance solutions can carry adverse consequences. It is critical to know what is actually happening in the business before taking action.
MCP has assisted many businesses and their owners make difficult decisions. along with many tools to support you in getting your growth mindset and financial confidence back on track.
Contact MCP:
(03) 9620 2001 or your Finance Partner:
enquiry@mcpfinancial.com.au
Follow us on Linked IN
The team at MCP Financial Services has specialised expertise in structuring complex debt arrangements. We can assist with review and restructuring, refinancing and renegotiating.