In Part 2 of this series, we provide some key advice for reducing debt risks for small business owners.
Risks as the business owner
Being a director of a company or a small business owner brings with it many risks to the individuals in the event that your business fails. This can lead to the bankruptcy of owners and directors. Many of these risks are not avoidable but can be mitigated by vigilance.
Reduce your risk of debt problems as the business owner:
Keep your accounts up to date and review them regularly
Seek out explanations for unusual trading activity, significant increases in creditors or debtors, or reductions in cash availability. Ensure that your bank account is reconciled regularly.
Keep an eye on your working capital
Current assets should always be at least greater than current liabilities as a guide. The higher the ratio – the better the working capital availability.
Have a back-up plan if one of your major customers fails to pay
How will you pay your own bills now? Do you have an alternative source of finance for an emergency?
Read the fine print on credit applications
These will often require personal guarantees of directors, and often even contain clauses enabling creditors to charge your personal property to protect their interests. If your business fails – your own personal property may be at risk.
Trusted advisors are a must
Seek professional advice or help from your accountant, book-keeper, and solicitor as required.
Does your business have an overdraft?
How is the business finance secured – by your own personal property? What happens to your house if the business fails?
Are your superannuation and GST/PAYG obligations up to date?
Early action to enter a payment arrangement if necessary, can reduce the risk that the ATO will take firmer action – such as winding up applications or issuing Director Penalty Notices. If the ATO issues a director penalty notice to you – immediate and urgent action is essential, as this can result in you becoming personally liable for company debts.
Are your tax lodgements up to date?
If your company’s tax liabilities are not reported within three months of the due date, and a director penalty notice is issued – the only way to avoid personal liability is by payment of the debt.
Ensure your insurances are paid up to date
Failure to adequately insure can be catastrophic! Obtain professional advice regarding your insurance needs.
Know what your off-balance sheet obligations are
Do you have long-term leases on property, what if you have to make some staff redundant – these liabilities won’t appear on your balance sheet, but represent additional exposure to the business
Ensure that your staff are capable and trustworthy
Many individual bankruptcies in Australia are the result of company failures, where directors have become liable to insolvent trading claims by liquidators. There are only very limited defences under the law at present to such a claim. In short, a director has a clear obligation to be aware of the financial circumstances of the company. It can be a defence where a director has believed on reasonable grounds that a competent and reliable subordinate was monitoring the company’s solvency position and keeping the director informed.
FOR MORE INFORMATION ON THE DEBT RISKS FOR SMALL BUSINESS
If you have any concerns related to any of the considerations discussed in this article, we encourage you to seek professional advice as early as possible.
For further information, please contact one of our Restructuring and Recovery Specialists.