Debt isn't something that business owners generally like to talk about. Normally it is something people prefer to keep quiet which probably reflects the fact that it's quite often not used strategically, but rather in response to a problem with the business.
These problems can arise in a range of ways:
Downturn in business, or the economy in general.
Failing to respond quickly to changes within the business.
Inadequate budgeting and cash flow planning.
Regardless of how the problem arises there are a few ways of funding the shortfall. You could go to a bank, or get a loan from friends and family, but the most common way small business owners tend to fund these issues is via the ATO.
These certainly aren't formal loans and it's often not intentional. The business starts to struggle financially and often the first creditor to stop getting paid in full will be the tax office, these debts start to pile up and the next thing you know you're getting calls and letters from the ATO chasing up their money. Not a great situation to find yourself in.
Ignoring the ATO is not an option. Failure to comply can result in the issue of a Directors Penalty Notice (DPN) which can find the company directors personally liable for certain ATO debts. Entering into payment arrangement after payment arrangement only to default over and over again usually isn't an option either with arrangements normally only being made available to taxpayers with good payment history.
What to do if you find yourself in this situation? Two things.
First. Make sure your lodgements are up-to-date and any employee entitlements (e.g. superannuation) are being paid in full and on time. It's important to fully understand what your debts are and keeping lodgements on track is one way of doing this. The ATO will always look more favourably upon a taxpayer that has their lodgements up-to-date over one that has not. As for employee entitlements, company directors can be made personally liable for these so it's super important these are always paid on time.
Second. Don't ignore the problem. If you can't see a way out of your debt which includes talking to your creditors, call in the professionals. Insolvency experts aren't all out to kick you out of the company and pick the bones of your business clean. Good insolvency people can work with you to advise on the right course of action to help keep you out of trouble and potentially save your business.
Can't my accountant help? Your accountant is a great place to start, but if there is a chance you're trading whilst insolvent you'll need to bring in specialists.
There are several ways that an insolvency practitioner may be able to help. This could involve voluntary administration whereby they take over the company and work with you to resolve the debt issue and hopefully get the business back in shape so you can take it back over. Another option is relatively new (Jan 2021) and it's called a 'small business restructuring plan' and involves the insolvency expert negotiating with creditors on your behalf to consolidate and reduce any debt you may have outstanding whilst you stay in control of the day-to-day operations of the business.
Eligibility for small business restructuring plans is as follows:
Debts of under $1 million.
Trading insolvently or close to it.
ATO lodgements up-to-date.
Employee entitlements all paid up.
Directors and/or company haven't used a restructure in last 7 years.
If this sounds like something that could help your business please get in touch with a reputable insolvency practitioner. Get in touch with us if you need a name and we can send you some options.
Bottom line? Don't hide from the problem. Get it quantified and then put a plan in place which may involve bringing in the experts (who may well not be your normal accountant).
If you have any questions about debt or anything else going on with your business why not get in touch? We'd love to help.