Don't go down with somebody else's Sinking Ship!

In an article published on 30 November 2011 (http://www.stuff.co.nz/business/money/6058202/Warning-of-more-collapses-as-banks-lose-patience), an Ernst & Young insolvency practitioner warned that a lot more businesses are “likely to go under next year” as banks lose patience with borrowers who continue to struggle as a result of the current economic downturn.  

The prediction is based on a view that banks are under pressure to “move things on” in situations where they have previously been more patient and giving a greater opportunity for struggling businesses to recover.

The recent abolition of gift duty also creates some new issues and risks.  Because assets can more readily be shifted into trusts or to other entities at short notice, it is more difficult to know whether the person/entity you are dealing with has, or will continue to have, any assets of note should you end up having a claim against them. 

As a result, even if your own business has no problem with its bank and is not presently struggling, it may be prudent to plan for a greater level of cashflow/debtor/creditor issues next year.   Some of the preparatory steps that could be taken to reduce the risk of stress to your business include:

• Reviewing your terms of trade or supply contracts, to:
o Ensure you can suspend/terminate work when there are signs you won’t be paid,            

o Give the ability to charge default interest and take other recovery steps in the event of non-payment,

o Allow you to register a security interest against the borrower (and any guarantor), potentially putting you ahead of any other unsecured creditors;

• Doing PPSR searches to establish what other securities (and thereby, debts) are already in place with parties you deal with;
• Ensuring that you actually register security interests on PPSR before handing over any goods, and put a system in place to ensure that all PPSR registrations are regularly checked to ensure contact details are up to date and that the registrations do not expire (they do not last indefinitely and need to be renewed periodically);
• Getting credit checks of any new customers before providing any credit (you might also want to do them for existing customers where you have a significant exposure);
• Require statements of financial position or other confirmations from your debtor’s accountant, banker, and/or lawyer to obtain greater certainty around who actually owns the assets you are intending to rely on; 
• Require personal guarantees from the directors and/or shareholders of any company seeking credit.  Alternatively you may wish to ask for a bank guarantee (as a number of landlords already do).
• Chasing unpaid accounts as a priority (allowing you to identify solvency issues as early as possible, getting in ahead of the pack but also allowing you to minimise any further exposures to the same party);
• Talking regularly to your bank when things are going well, and even more so if there is any indication that you will be facing any cashflow or other financial challenges.  The more pro-active you can be, the more the bank is likely to trust you to keep things under control; and
• Working closely with your accountant and lawyer (as applicable, but often in unison) to ensure that any potential issues are dealt with straight away and also that your business and other assets are structured and held in the most advantageous way (possibly to take advantage of some of the same features of trusts that other people may seek to use to your detriment).

In general, the message is that to a large extent, you can make your own luck.  With potentially tougher times ahead, taking pro-active steps now could save considerable stress/loss later (enabling you to focus on actually growing your business and taking advantage of any opportunities that arise through others being less prepared!).