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8 Steps to Take if Your Company is Experiencing Financial Distress from COVID-19

Posted by Lanyana Financial Group on Apr 7, 2020 10:23:00 AM

In a short time, the Coronavirus (COVID-19) has had a devastating impact on businesses across Australia. For many, the Government regulations and restrictions to enforce social distancing and other measures may result in a sudden fall in demand for your products or services, reduced supply levels and costs and staff shortages.

The Australian Bureau of Statistics (ABS) in their Business Indicators, Business Impacts of COVID-19 March 2020 Report found that approximately half of Australian businesses (49%) had experienced an adverse impact as a result of COVID-19, with 86% of businesses expected to be impacted in the coming months. The major industries impacted include accommodation and food services, retail, wholesale trade services and arts and recreation services.

As a company director, it’s important to understand your business’ current financial position and the impact COVID-19 may have on its ability to continue trading. If your company is experiencing financial distress, it’s essential you follow the below 8 steps to help keep your business operating during the COVID-19 crisis and know when it’s time to seek professional restructuring or insolvency advice.

Step 1: Know when You Need Help

The COVID-19 pandemic continues to impact Australian businesses with growing uncertainty around the future of the economy.  Many businesses have been forced to close due to the Government’s tight measures to help stop the spread of the virus. This has resulted in a number of companies given no choice but to stand down or terminate staff members, resulting in their revenue stream ceasing with no certainty as to if their company will continue to trade in the future.

Even those businesses that can still successfully operate – some of which have had to transform their business model to continue trading – are still struggling to cope due to the drastic change in environment.

If your company has been majorly impacted, it’s important to recognise this distress as soon as possible in order to take appropriate action depending on your circumstances. This requires seeking advice from an insolvency expert to discover the options available for your business moving forward. As insolvency specialists, we understand how difficult it is to see the business you’ve worked so hard for in financial distress, but recognising the signs will provide you the best chance to put a plan in place in order to help it survive.

Step 2: Understand Your Company’s Financial Position

After you accept your company is experiencing financial difficulties, it’s time to find out your company’s current financial situation. This includes knowing:

  • How much debt you owe,
  • Who you owe money to, and
  • When major bills such as rent, loans and tax are going to be due and how much they’re going to be.

Check your customers to see who owes you money and if they’re going to be able to pay. You may need to rely on customer payments to help make it through this difficult time. Make sure your books and records are accurate and kept up to date to ensure your protection as a director if your situation declines in the coming months.

Step 3: Determine if Your Company is still Solvent

The Australian Securities and Investments Commission (ASIC) states that an insolvent company is one that is unable to pay its debts as and when they fall due. To avoid insolvency, you may be able to source more funds from a lender or investor to pay the bills.

If you can’t solve your cashflow shortage, you may need to consider an insolvency appointment to comply with your director’s duties and legally manage the survival of your business, or alternatively its closure. At Revive Financial, our Registered Liquidator can be appointed to your company as a Voluntary Administrator, to help reduce your Company’s debts and expenses to an affordable level so your business can survive. Alternatively, you can commence liquidation proceedings. Company Liquidation allows you to wind up your registered company and puts a stop to creditor debt recovery action.

Due to the ongoing COVID-19 crisis, the Australian Government has introduced new changes to the current insolvency laws under the Corporations Act 2001. These changes are as follows:

  • The timeframe for company directors to respond to a Statutory Demand is now 6 months instead of 21 days. This gives you 6 months to pay the debt in full or make a payment arrangement before winding up proceedings can be commenced at Court.
  • The timeframe for people (including sole traders and partnerships) to respond to a Bankruptcy Notice is now 6 months instead of 21 days. You have 6 months to pay the debt in full or make a payment arrangement before Bankruptcy proceedings can be commenced at Court.
  • Directors now have automatic Safe Harbour Protection for 6 months from personal liability under insolvent trading provisions.

Although this Government assistance provides temporary relief, company directors can still be liable for unpaid superannuation, PAYG and GST owed to the ATO. You need to ensure that you are proactive around your company debts and are following your director duties.

Step 4: Communicate with Your Bank and Other Lenders

Once you’ve determined your company’s financial position, it’s best to talk to your bank and lenders about the current financial situation your company is experiencing and discuss the outlook for your business’ future. Seeking support from the bank and other lenders early provides you time to see what assistance is on offer to help you trade through.

Due to COVID-19, many banks and lenders are offering support by way of loan holidays, reduced interest and waivers of fees and charges. It’s in your bank’s best interest to support you through this challenging time and remain a customer in the long-term. To find out what support is on offer, contact your bank or lender directly.

The Coronavirus SME Guarantee Scheme is also available for small to medium enterprises (SMEs) across the country. Under this scheme, the Government is providing a guarantee of 50 per cent to SME lenders for new unsecured loans to be used for working capital. This allows eligible businesses to borrow up to $250,000 for 3 years with an initial 6-month repayment holiday.

Step 5: Talk to the Australian Taxation Office (ATO)

The biggest trigger for Company Liquidations and Personal Bankruptcies in Australia is the Australian Taxation Office (ATO). Generally, tax costs are one of the largest bills that a company is required to pay.

If you are unable to pay your tax when it comes due, you may be able to negotiate a payment plan with the ATO.

You need to be ensure you keep your tax lodgements accurate and up-to-date. If so, communicating with the ATO will be much easier and they will be supportive of trying to help you get through this tough period. Due to COVID-19 and the adverse impact it is having on Australian businesses, the ATO is withholding enforcement action and is providing flexibility to tailor payment arrangements where needed.

Step 6: Talk to Your Suppliers

Disruption from COVID-19 is forcing some tough conversations about payments. It’s never an easy topic, but you need to have an open discussion with your suppliers to work out a payment arrangement that will suit both parties. Your suppliers are most likely facing a difficult time as well and will know that other customers are experiencing financial distress. Just like the banks, it’s in their best interest to keep you as a customer for the long haul.

Step 7: Seek Professional Assistance

If you’ve taken all of the above steps and you’re still struggling with company debt, it’s time to get qualified help. Our team members at Revive Financial have years of experience assisting businesses through difficult trading periods to get their company back on the path to success. We have a qualified Registered Liquidator and corporate restructuring and insolvency professionals on our team who are on-hand to provide you with the best advice for your company moving forward.

Our team can perform a business health check to help you understand the viability for your business during this time and company debt solutions available to you. Your company’s individual situation will depend on the solution that is right for you. We can assist with:

  • Implementing a business restructure/turnaround to provide your company with its best chance to survive
  • Finance options
  • Putting your company into Voluntary Administration to give your company the opportunity to trade through
  • Initiating winding-up proceedings by putting your company into Liquidation fast and eliminating business debts, allowing you to move on

Step 8: Take Care of Yourself

Having your company in financial distress can adversely impact your mental health and wellbeing. It can be an overwhelming, stressful and anxious experience so it’s important you take care of yourself during this time. If you’re experiencing any signs of emotional distress, it’s time to ask for help. There are many free services you can take advantage of, including Beyond Blue and Lifeline.

We’re Here to Help

At present, the COVID-19 pandemic continues to threaten Australian businesses with many facing financial distress- just like yours. It’s important to understand when your business is in trouble and seek qualified advice as fast as possible. Get in touch with our team at Revive Financial today on 1800 560 558 for a free, no-obligation consultation.

First published on Revive Financial.

Topics: Business Debt

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