Navigating business debt & insolvency

Financial literacy – without it, no business, can survive, let alone proposer.

It’s especially true in times like these, where world leaders are unpredictable, chaotic and batshit crazy.   

So with every man and woman for themselves, The Echo asked Ben Kirkpatrick, director of BDK Risk Management, questions around the state of small businesses, and how to navigate debt and insolvency.    

Which type of local businesses do you see struggling and which businesses appear to be doing okay?

‘Local businesses that would be struggling are likely ones that are discretionary/non-essential, that typically cannot pass on costs – such as higher fuel prices. These would include restaurants and cafes, retail, transport and building and construction.

‘Businesses with defensive qualities are probably okay, these include pharmacies and medical practices.

‘The other issue is that, like the rest of Australia, we are dominated by oligopolies. In my view, this has weakened competition in many areas, especially in the grocery and alcohol industries, where Woolworths and Coles dominate.

‘This allows incumbents to adjust their pricing, which is typically difficult for smaller operators.

‘Woolworths and Coles also control most of their supply chains, enabling them to adjust to rising input costs, especially fuel’.

What types of businesses in the region are most at risk right now?

‘Businesses at most risk in the region are those carrying ATO debt, this accounts for eight out of ten businesses in this position.

‘The total amount of ATO debt is more than $105bn, with collectable debt estimated at $50bn.

‘There are also over 300,000 Director Penalty Notices (DPNs) outstanding, and small business accounts for more than 65 per cent of this debt. 

‘Since Covid, the amount of outstanding ATO debt has skyrocketed.

‘We have seen ATO collections increase over the last two quarters – a trend we expect to continue.

‘There are a variety of options for restructuring, so early intervention is critical.

‘We advise companies on restructuring, especially following ATO debt issues’.

What’s the single biggest mistake a struggling business can make?

‘That’s a really good question and there is one answer: Take action early.

‘The biggest single mistake a struggling business can make is thinking everything will get better.

‘Living in denial and not addressing the problem is the biggest problem.

‘The earlier you engage with a firm like ours, and have that conversation, the more opportunities you will have to fix your situation. 

‘We see businesses every day that have not dealt with their issues, suddenly finding their options very limited.

‘We have seen everything.  We had a case where the director had not paid tax for seven years, and now owed the ATO $1.8m. 

‘We worked with the director and the court-appointed liquidator, and negotiated a settlement for literally cents on the dollar.

‘Take action early.’

How have interest rate rises and tighter lending conditions changed the type of cases you’re seeing?

‘Higher interest rates have had a deleterious effect on business; further, tighter lending conditions are causing further strain on balance sheets.

‘With inflation pushing higher, we believe interest rates will only increase – and we may see stagflation in Australia for the first time in 50 years – this typifies where the economy is at.

‘With credit access tightening and the cost of money increasing – we are seeing businesses of all industries in peril. Access to capital is critical for business, and many companies have struggled to attract funding.

‘Thankfully, we have various specialist lenders who work with us and provide funding to businesses – even if they are in administration.

‘Essentially, higher interest rates and tighter lending conditions have only increased the types of cases we are seeing’. 

What specific economic pressures are currently pushing more businesses into distress right now?

‘Australian businesses face the worst economic picture in five decades.

‘The biggest issues are higher fuel costs, higher taxes, inflation, higher interest rates, global unrest and government policy.

‘Covid has been the biggest disruptor in the last five years. The way governments reacted to, and dealt with the virus has caused a myriad of issues. During Covid, there was a moratorium on companies paying tax, and ATO collection and enforcement.

‘This led to a blowout in ATO debt. The interest on this ATO debt alone is growing by billions per year.

‘Given the above pressures, we are seeing so many businesses in distress, and as mentioned, it is best to act early.

‘We work at the coalface of business solvency, and are seeing huge numbers of insolvencies that are now accelerating. One of my mentors (a 40-year veteran in the sector) said he hasn’t seen anything like what we are seeing since the GFC, and cannot believe the media is not reporting the real picture.

‘The economy during the GFC was protected by taxpayers, especially because the government provided banks with “deposit guarantee”. This single act protected Australian banks – and I believe, to the detriment of the consumer/taxpayer/mortgage holder.

‘Today’s economy has been somewhat protected by rampant government spending (increasing government debt), specifically related to Covid. This shielded many businesses, especially from collection activity by the ATO.

‘With Commonwealth and state debt at high levels, higher interest rates are starting to impact solvency.

‘The state of Victoria is technically insolvent, with debt forecast to be approximately $200bn by 2030. Interest payments are expected to be around $32m per day!  This is a repeat of the late 1980s and early 90s.

‘ATO debt stands at $105bn, with $50bn estimated recoverable’.

Is the ATO becoming more aggressive in debt recovery, and what changes have you observed in the past 12 months given the economic uncertainty?

‘The ATO is on the warpath for non-compliant businesses – and rightly so.

‘However, the ATO understands business conditions, which is why we continually recommend engaging with risk management firms early.

‘We have seen a significant increase over the previous 12 months in collections and enforcement activity by the ATO.

‘Again the more severe enforcement actions – wind-up notices and liquidations – have increased greatly. We see this trend increasing’.