Top ways for small businesses to manage debt effectively

- February 5, 2019 3 MIN READ

One fifth of startups fail in the first year and only 50 per cent of businesses survive after the first five years. There are a number of contributing factors to the success or failure of a business. In particular, finance is an important factor in determining whether or not a business is sustainable in the long-term.

Despite budgeting and forward planning, some entrepreneurs and small business owners still end up spending more than their earnings, which can lead to debt and facing difficulties in knowing the best solutions to manage it effectively and efficiently. There are a few key ways to manage debt without having to pull your hair out.

  1. Buying time

To hold off creditors you can advise them that you are having some temporary cash flow issues and that “by law” you legally cannot pay them as it may be a priority payment. Your primary duty is to all creditors in such times and you cannot favour one over the other legally so it is a valid line to say “I am not allowed to pay you right now”. You should keep communicating though – their fear comes from your silence, so keep updating them of your situation.

  1. Trading through the problem

We have a new “Safe Harbour” legislation for companies and struggling businesses in Australia. The Productivity Commission found that our country had a culture of punishing failure for company directors. If a director was found to have been trading insolvent, he or she would become personally liable for the company’s debts incurred at that time. This meant that directors were punished for failure and were not motivated to fix what could be a curable problem (i.e. to try and turnaround the business). This was not beneficial for the economy and jobs, so last year they introduced laws whereby if a company is struggling, but the director has a reasonable plan or strategy to turn things around, then s/he will not be personally liable should that plan fail. It is a big legal site in Australian law and means that directors should not be afraid to “have a go” when in debt.

  1. Tell debt collectors where to go

ASIC and the ACCC have strict guidelines for debt collectors and can penalise them for breach – this includes limiting times when you are contacted. Debt collectors are not allowed to call early in the morning, late at night or on public holidays. They cannot harass or threaten – they can only call three times per week or up to ten times per month. Debt collectors are not allowed to tell any third party who they are or that you are in debt under privacy laws. They cannot mislead you as to their powers or the law, to name some restrictions and limitations. If someone else has notified them that they are your agent e.g. a lawyer, accountant or debt counsellor, debt collectors cannot call you at all. You can simply say to them “Your conduct is a breach of the ASIC guidelines for debt collectors and if you don’t stop contacting me, I will report you”.

  1. Stay in respect to Ipso Facto clauses

New laws in Australia now mean that clauses in contracts which provide that the contract can be terminated if one party is thought to be insolvent are no longer enforceable. They are “stayed” or frozen if a company is in difficulty but is relying on the safe harbour provisions to turn the company around. The contract must remain on foot. This was enacted to help struggling businesses. Often when a company is trying to improve and trade through a rough patch, its suppliers or stakeholders with whom it had contracts with would see missed payments and debts and rely on these clauses to stop doing business with that company, which really would push them into liquidation. The business would be trying to bring money in and then a key supplier would say “You didn’t pay me last week so you are insolvent. This means our contract is terminated and we are not delivering to you this week”. The law now provides that contracts cannot be terminated for insolvency.

  1. AFCA – Australian Financial Complaints Authority

This is a new body which was established in November 2018. The AFCA hear complaints about credit providers, banks or anyone who has lent money to your business. You can go to AFCA to make a complaint about them. The effect of this is that it ceases all recovery action (freezes everything and compels them to negotiate with you). AFCA is not a court of law – you do not need a lawyer and they do not apply rules of evidence. They mediate or adjudicate and conduct telephone conciliations. You can lodge a complaint online in less than five minutes and the creditor can no longer make collection calls or pursue legal action whilst AFCA considers the matter. They have the power to make monetary awards in favour of small businesses up to $1 million dollars. An AFCA decision is binding on the lender (they cannot appeal to any court – the decision is final) but it is not binding on the borrower (you – so if you do not like the finding, you can just ignore it!). There are no costs awarded against you if you lose in AFCA so there is literally no downside for you.