With the number of insolvencies continuing to rise among both small and large businesses, distressed companies must rethink their strategies towards banks and the Australian Taxation Office (ATO) by conducting their negotiations in a conciliatory rather than a hostile or aggressive manner, according to PKF chartered accountants and business advisers.
Ken Whittingham, Head of PKF’s Corporate Recovery practice, said prior to the global financial crisis businesses often had the upper hand in loan negotiations as credit was readily available from a broad range of sources. However, with the financial environment having changed significantly, businesses could no longer afford to employ their previous negotiation strategies.
“Businesses need to undergo a change in mindset and start working in partnership with banks and the ATO. Banks in particular are keen to preserve their share price and want to avoid large provisions on their balance sheet. Therefore, with businesses in difficulty, the best approach is to try and negotiate a deal with the banks,” said Whittingham.
Whittingham noted that, in the past, banks traditionally assessed a business’s loan eligibility by examining the security they could provide. However, banks are now more concerned with a company’s cash flow as well as a strong business plan.
He also said while banks are likely to be open to negotiating, the ATO would be less accommodating as it continues to be less lenient on distressed businesses. Whittingham said: “I’ve noticed a substantial shift in the ATO’s behaviour towards distressed businesses. Pre-GFC the ATO was content to work with businesses to help them remain solvent, however, the ATO is issuing a number of Director Penalty Notices (notifying businesses they have 14 days to settle their credits or they will become insolvent) to businesses large and small from almost every industry.
According to Whittingham, there was a 20 to 30% rise in insolvencies in 2010 and he expected this trend to continue in 2011 as businesses continue to feel the strain of an economy not yet fully recovered.
“When you combine this with the added pressures of interest rates, fuel prices and electricity rates, and retailers facing the added threat of online sales given the strength of the Australian dollar, businesses across a multitude of sectors face an uphill battle to survive,” he said.
Whittingham also noted that simply re-financing was no longer the safe fall-back option it once was. “Pre-GFC, refinancing was a relatively easy way for businesses to re-position their business. However, with most banks now carrying a number of loans with higher risks of defaulting, they’re generally hesitant to allow businesses to re-finance.
“Ultimately, by planning ahead and seeking early advice, businesses can put measures in place to minimise the risk of insolvency,” he concluded.
Advice to businesses:
- Be proactive in your dealings with the banks and the ATO. Ensure you approach your dealings in a conciliatory rather than hostile or aggressive manner
- Ensure all your financial information and book-keeping is up to date
- Seek early advice from an accountant, solicitor or insolvency practitioner.