Business ownership can be fraught with personal risk, right through from banks requiring a mortgage on the family home to the ATO being able to hold directors personally liable for company tax debts.
To minimise this risk, the first step for any SME owner is to ensure the business is properly capitalised, with a strong, considered business plan (that looks at risks, not just the upside) and support from qualified advisers such as the trusted accountant.
Once this solid base is in place, I'd suggest four key ways to help businesses protect their personal assets.
1. Factor in factoring
When accountants advise clients about ways to grow the business without impacting personal assets, they'd do well to consider factoring - especially for clients in industries including manufacturing, wholesale, transport and logistics, mining services and labour hire.
While the bank overdraft is well known to accountants, not all are familiar with the growth benefits factoring, or debtor finance, can provide to small and startup businesses without putting the business owner's house at risk.
Factoring is a line of credit secured against accounts receivable - a flexible form of finance that provides access to working capital that would otherwise be tied up in receivables for 30 or 60 days or more.
A business invoices their client directly and the factoring provider will, typically within 24 hours, advance up to 80 per cent of the value of approved invoices, less fees. The remaining 20 per cent becomes available to the business when the invoice is paid in full.
This provides the most efficient and effective form of cashflow finance and rarely requires personal assets as security.
Some providers also offer selective invoice finance, which allows the business to pick and choose which invoices they factor rather than having to commit their whole book.
Debtor finance facilities are self-liquidating. Instead of taking on additional debt, an advance is offered on money that is already owed to the business. Most factoring facilities do not require real estate security so there is no need to use the family home to secure the borrowing facilities required to run a business effectively. On top of the peace of mind in removing the family home from the equation, benefits of debtor finance include:
- being able to boost turnover due to bringing cash receipts forward
- not having to offer costly settlement discounts to encourage early payment
- freeing up the family home means it can be used as collateral to build the client's own personal wealth
- improving buying power, which enables the business to get discounts for early payment
Make SMEs aware of caveatable right
Banks and most lenders will usually require personal guarantees, as will some suppliers. Business owners must be aware of whether a guarantee provides a caveatable right (effectively a right to security, beyond the normal rights of a guarantee).
SMEs should ensure they understand what it means to give such a guarantee. It is often possible to avoid giving these guarantees to major suppliers – the key is to have strong relationships by engaging deeply and being open about plans for the business.
Don't lag with tax obligations
Accountants play a crucial role in ensuring SMEs' BAS and Activity Statements are lodged on time and taxes are kept up to date. In my experience, lodging statements on time even if the business is unable to meet tax commitments makes negotiations with the ATO much easier. Engaging specialised tax experts to interact with the ATO to put in place a repayment program is also advised.
Another key strategy is to hold the family home in a way that completely separates it from business dealings. This can be done through owning the property in a discretionary trust or holding it in the name of a “not at risk” spouse (i.e. not a director or guarantor).
Having the family home tied into supporting business borrowing can be a hair-tearer for SME owners, especially in uncertain times.
Renegotiating with the bank to increase facilities as the business grows threatens to be a real distraction. This is true whether the funding is required to support rapid growth, consolidation, change in ownership or overcoming short-term conditions.
In 2015, more than 4500 Australian SMEs, with combined annual revenues of $65 billion, using debtor finance to fund their business growth.
Yet research shows there still needs to be more awareness amongst SME owners of options beyond the bank overdraft.
The Scottish Pacific SME Growth Index, which represents the views of Australian SMEs from a range of industries, asked SME owners about the constraints to growing their businesses -77 per cent of SMEs forecasting revenue growth said they were required to use personal assets as collateral for business growth.
It is shocking that so many are providing collateral from their personal assets, rather than using the assets of the business to support their growth. The onus is on our industry to increase awareness amongst key advisers such as accountants that there are other solutions, such as factoring.
Greg Charlwood is general manager of national cashflow solutions specialist FactorONE. A passionate supporter of SMEs, Greg has established and managed some of the major debtor finance businesses in Australia and twice chaired the industry body DIFA.