SMEs to get a reality check in 2010

The global financial crisis (GFC) has had an enormous impact on all global economies and yet in Australia we have been fortunate enough to remain out of a ‘technical’ recession.

In this country there has almost been an overwhelming feeling of pragmatism from the providers of credit, such as financiers, trade creditors and even the Australian Taxation Office (ATO).  This sense of cooperation and collaboration has occurred despite the likelihood of distressed debts increasing.

In the past 18 months we have observed some significant insolvencies and workouts at the big end of town. It is not surprising that may of these have been associated with the property sector, which has seen significant fall in values leaving financiers exposed (e.g. Westpoint, Storm Financial, Great Southern, Timbercorp and Centro).

At the other end of the scale, personal bankruptcies are at an all time high.

The driver of our economy, however, the SME sector, has been most noticeable by their absence from insolvency statistics.  This does not necessarily come as a surprise given the pragmatic response to the GFC.

In this regard, the Government has provided funding to support consumer spending and the Reserve Bank have cut official interest rates to the lowest point in over 50 years. Since March 2009 we have seen a marked change in the activity of the ATO in recovering debts with a propensity to be most agreeable to proposed repayment arrangements for overdue debts, particularly where the taxpayer is an active business with employees. To go hand in hand, financiers have sought to indentify at risk files and taken any necessary provisions; best to pin it on the GFC now than have it increase further in 2010. 

The pragmatic response to the GFC is commendable, however, concern is increasing that many businesses in the SME space may have been lulled into a false sense of security.

Indeed, 2010 is likely to see reality ‘bite’ with the feeling of pragmatism and goodwill giving way to irresistible economic reality.  That reality has already commenced with official interest rates now 125 basis points higher than the emergency rate setting, with actual increases upward of that, and the forecast of more to come.  

2010 may also see financiers take a different approach to the recovery of distressed debts.

Whilst lenders have increased their provisions during the course of 2008 and 2009, this does not necessarily mean that the financiers have been actively seeking to resolve their distressed debt positions by way of asset realisations. This position is again not surprising given asset values have been depressed and financiers have generally been supportive of the pragmatic GFC response.

With asset values on the improve, however, and a significant uplift in stock market and business confidence generally over the last few months, lenders may now be more inclined to actively recover distressed debts. To temper this position, however, the financiers will no doubt be conscious of not flooding the market with distressed assets as this may simply deflate asset values once again.

But the biggest sting in the tail may simply come down to the Federal Government’s reading of the state of the economy.

Tax debts are often one of the largest (if not the largest unsecured creditor) in an insolvent company. This circumstance will often come about due to the self assessment nature of our tax system and also that the non payment of tax liabilities is the easiest form of funding, with no financials required, no due diligence of credit risk and no credit application; all you need to be is a taxpayer..

Importantly, these circumstances have been exacerbated by the GFC and the lack of available credit through traditional sources of debt. This remains an issue for business.

As a result there is an increase in tax liabilities and reduced recoveries at a time when the National Budget is being run at a deficit. 

Whilst the ATO have been far more active in debt recovery actions since November 2009 than at any other time since March 2009, this just may be the flood gate about to open.

The economic reality is that the time will come when the pragmatic approach will change.

It’s not a question of if, but when.

So for businesses with either existing cashflow issues, overdue tax debts or secured borrowings, we would strongly encourage a review of cashflow projections and the seeking of professional advice sooner than later.