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Troubled businesses looking to access the new simplified debt restructuring process should be wary of a potential cash-flow squeeze, says an insolvency partner.
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SMEs cautioned on cash-flow pressure as insolvency reforms kick in
07 January 2021
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Since 1 January, business with liabilities of less than $1 million and are up to date with their tax lodgements and employee entitlements have been able to access a simplified debt restructuring process.
Hall Chadwick insolvency partner Blair Pleash said that while the new option would open up restructuring to SMEs for whom voluntary administration costs would be too prohibitive, he believes most directors are not fully aware that cash-flow problems may be exacerbated by taking up the new restructuring option unless they can access sufficient funding throughout the restructuring process and into the future.
“There are a lot of businesses affected by COVID who in early 2020 could not imagine they would be in this scenario. We are dealing with a new cohort of directors who had never contemplated insolvency and they need considered advice – sooner rather than later,” Mr Pleash said.
“Directors should review their position as soon as possible as there is a lot in play – once support and protection measures are withdrawn, will they have sufficient cashflow? If not, they need to consider restructuring.”
ScotPac senior executive Craig Michie said that while the option would safeguard directors from the implications of trading insolvently while arrangements are put in place, moving to restructure could create cash-flow tensions.
“The obvious cashflow challenge with this arrangement is that suppliers become aware of the intent and withdraw credit altogether or apply ‘cash on delivery’ terms,” said Mr Michie.
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“Accessing the cash tied up in an unencumbered receivables ledger that generates cash to bridge this gap is a logical step for small business directors and their advisors to consider.”
Mr Michie believes directors and their advisers should be aware of the option of accessing their accounts receivables to solve not only their original cash-flow concerns but also the cash-flow issues caused by the restructuring process.
“It’s important for insolvency practitioners, accountants, brokers and others who advise SMEs to be aware of the lending options available to small businesses as they undertake restructuring,” said Mr Michie.
“Funding that is fast and without red tape will be crucial as these restructuring plans are put in place,” he added.
“Even if a small business is not at the crisis point now, taking action now or early in the new year to get in place this style of funding means it is ready to draw down from, if and when the need arises.
“There are funding products available where the business is only charged when they draw down. It makes sense to have such a facility in place so it can be accessed quickly if required.”
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