How to handle financial difficulties and debts in your business

As a strategic bookkeeper, I meet business owners who've accidentally ended up in more debt than they can trade out of – tax debt, super debt, personal debt, and more. And so today, let me share with you how you can handle financial difficulties and debts in your business, which I feel privileged to share due to real life impacts I see when these are handled properly.

This week's blog post is mostly straight out of the Better in Business podcast as the details are so critical to help you do better, and absolutely thrive in your business. If you feel like this topic speaks to you, or you just need someone to redirect you or just hold your hand, you can always get in touch with me.

To accurately tackle this business matter, I tapped Hank de Jonge from de Jonge Read. Hank and his team have been instrumental in changing and improving the outcomes for literally thousands of business operators suffering from some type of financial difficulty for over 17 years. De Jonge Read is NOT an insolvency practitioner nor a liquidator, which means they don't have a legal obligation to get the best result for the creditor. But rather, de Jonge Read are acting for the BUSINESS OWNER or director to get one thing and one thing only: the BEST outcome for the business owner and their families.

Hank's Story:

"[...] I guess the reason that I started this firm was due to the fact that I got into FINANCIAL DIFFICULTY myself, and I couldn't find anyone to give me that DIRECTION and that guidance that I needed. I had a company on the Gold Coast and my market was in international tourism. We had September 11 come along, and our turnover went from around $7 million a year down to about three. So suddenly, we simply couldn't afford to pay the bills. I had a really good accountant, a really good lawyer, but neither of them were insolvency experts. And I was really wanting to know, How do I save the house? How do I save the car? What could I do to save the business? They suggested I speak with an insolvency practitioner, and so I sat down with him and asked him those same questions, but he basically said, look, taking on the appointment as a liquidator or an administrator of the firm, he's got a fiduciary duty to get the best resolved accreditors, not the director or the individual. So whilst that insolvency practitioner certainly didn't know all those answers, he couldn't advise me as a company director on the best way to go. Going through that situation, I found it quite a distressful period. I was really scared. I didn't know who I could talk to, who could help me, who could give me that guidance. I didn't have a lot of money, so it was quite a horrible experience, and it put a lot of pressure on me and even my family. Coming out of that, I realised that the outcome certainly could have been a lot different if I would have known a lot of the things that I know now. Hence, I decided to set up the firm de Jonge Read – to help company directors and individuals through no-nonsense advice and strategies on how best to navigate that INSOLVENCY framework, accompanied by unrivaled emotional support."

That emotional support he brushed on is actually a really big thing. I've been out to see clients before, and I've seen what they can't see. There are instances where I have brought their books up to date and

they actually had no idea that they had run up DEBTS to the ATO or to super,

and I'm the bearer of this bad news.

And often, they also can't see that they're not going to be able to trade out of it. So when I have to deliver that news, that emotional side is what I worry most about. The money is one thing, but going through this just has such dire consequences.

Plus, one of the things that I see business owners do when they find themselves in debt is go, "Well, I'll keep working, I'll keep trading, and if I work hard enough and I get more sales, then hopefully I'll be able to pay that debt down," – which I see as a big problem because there's a delay.

So I then asked Hank –

As a business owner in debt, when should one act, and

what should one do?

Hank de Jonge: "Quite often, PAYMENT PLANS with the ATO or with a creditor can be a great way of dealing with situations as long as the business can afford to make those repayments. But, entering into payment plans where a client can't afford to make those payments or it's really pushing them to a level, they need to think about other different options. The government did come up with some options during COVID – the Small Business Restructure being one of them, which is a bit of a system whereby a company director can put up an offer to creditors, in a sense, and the dollar offer as full and final payment. And that can often be handy in a situation where a company director or business owner can't afford to pay all the debts, but can afford to make a PART PAYMENT. There are other options available as well. And I guess the idea is if a client or a business owner is in a situation where they're suffering and they they've got some insurmountable debt, it's just paramount that at the earliest possible convenience that they sit down with an ADVISOR, and have a bit of a look on the different OPTIONS that are available, because there are a number of different options in the insolvency framework that can work. But, it really depends on what that client wants to do. Do they want to keep going with the business? Is the business a good business or is the business losing money? Or is it a business that just had a one-off event and that's been dealt with and it's looking rosy moving forward? It's really about sitting down, getting a good understanding of all of those points, and then from there, making a decision on the BEST way forward."

I actually describe Hank and his organisation as the big cushion that my clients can land on. I actually didn't know originally that there was a group like de Jonge Read out there that was in-between, that could act for my client. So basically, it is about ACTING EARLY.

So if you've run up some debt, what I recommend is don't try and guess how you're going to get out of it. Don't try and look into the future. If you ring Hank and ring his team, the consultation is complimentary. And the thing is, yes, they can say, "Okay. Well, here are your options," and you could move ahead with them if that's going to be the best option.

Point is, they can tell you what to do next.

I think the other thing is the options around insolvency, or just options generally – there are so many things that the de Jonge Read group know that we don't know. Business owners may just don't know what options are available to them, like the Small Business Restructure. They don't have the relationship with the tax office that Hank or I have – we negotiate with the tax office often on a business owner's behalf, and we get incredible results. And it speaks to the kind of results that any professional in this area can get. You just don't know what you don't know, and you won't know if you don't investigate.

So then, what can business owners do proactively?

How can business owners set themselves up from the beginning, so that if they find themselves in DEBT and DISTRESS – because things like COVID happened, things like September 11 happened – what could they have done first that will make this process easier to navigate?

Hank de Jonge: "There's a couple of really, really clear things that can be done. Quite often, company directors or business owners lend money to their companies to start them off. And it might be by way of an overdraft on their family home, or it might be cash advances that are provided to the company or business over a period of time. One of the basic things that can be done is to SECURE that LOAN that a company director or business owner might give to their business. That should be secured and recorded properly. And by properly, I mean via a loan agreement, and also, having that debt secured against the PPSR. As long as that's done within a certain timeframe, that's what we can call a SECURED CREDITOR. And if that business ever gets in trouble in the future, that secured creditor will be paid as a priority before unsecured creditors. So for example, if a business owner was going to go to a bank to borrow the money, an overdraft or a loan, the bank would say, "Yep, no problems at all. We're happy to advance those funds, but we will take security over the company." Now, in this case, the director or business owner is acting as a bank and providing money to their company. So therefore, registering that on the PPSR is critically important, because like I said, that will make them a secure creditor. It also gives them further options if that company was ever to go into any type of insolvency. That secured arrangement is definitely beneficial. So that's one thing that can be done. The second thing is looking at the right COMPANY STRUCTURE. We see lots of businesses start off with a one company structure, and that one company holds all the ASSETS. It might own the goodwill, the plant and equipment, and also trades the business. The issue with that is if that business ever gets into trouble and maybe a COVID event or something happens that's completely beyond the director's control, and that company needs to enter into LIQUIDATION, all of the assets of that business end up in the control of a liquidator. Quite a basic and very, very good structure is to use two entities: one of them being an ASSET-HOLDING entity, which might own the goodwill, plant and equipment, and any intellectual property, and a SEPARATE entity as a trading entity. These two entities then get linked via a LICENSE AGREEMENT. And by having a good structure and a reasonably simple structure in places similar to that, if the trading entity ever falls into trouble for whatever reason, it is separate from the asset-holding entity. So it can again make that situation much easier to handle in an unfortunate event such as an insolvency."

The secured creditor does sound really easy and logical, and it is something that de Jonge Read can help businesses with. As Hank puts it, "We're basically a project manager – it is the best way to describe our service offering. We use separate organisations to actually do the registration and to prepare the loan agreements, and we certainly do have the right people available to put those in place."

Now in terms of the tax office – as a bookkeeper, I'm getting a lot of correspondence at the moment about stuff the tax office is doing, and we're getting warnings to pass on to clients about impending FINES. There was a lot of kindness over the two years that spanned most of the pandemic, but now, there seems to be these warnings that you're going to get fined, that there's going to be action taken.

What I really want to encourage business owners to do is NOT TO HIDE from this debt. It is hard, and it is really scary. And what you want to do when this happens is you want to avoid everything, but we care. There are so many of us out there that care, and we want to help.

And so here's an overview of what's happening at the TAX office, and why you should really take action if you're in any debt at all.

Hank de Jonge: "For any business owner, sticking your head in the sand is the wrong thing to do. Because without a doubt, the ATO are starting to move. And I guess quite often, we'll meet with clients and we'll sit down and they'll come in and they'll be scared and they haven't got any direction and so on. What we do is we'll have a look, put together a plan, put all that in writing, and they've got that. And then they might say, "Well, look. We are going to go back. We're going to try for another month," or "We are waiting for a big deal to come through," or whatever it might be. But the bottom line of it is they've got a PLAN B, and they've got something that they can come back to if what they're hoping to happen doesn't happen. So I think that's one big thing, and that allows people to sleep a little bit better at night. So what's the ATO doing? What we've seen over the last two and a half years or so is a very, very quiet ATO. We've seen very, very little action whatsoever as far as wound up applications and chasing any debt. And the ATO have been very, very helpful to the Australian taxpayers and to businesses. Over the last few months, we've seen the tax office issue warning letters in relation to directors PENALTY notices and in relation to reporting DEBTS of companies to credit reporting agencies. Never ever in the past have we ever seen the ATO issue warning letters. This is something completely new. And again, the whole idea was to get taxpayers to pick up the phone and start talking to the tax office and start to put together some arrangements and so on. The whole idea was they just wanted COMMUNICATION. So just to explain what a directors penalty notice is – it's a document that the tax office can issue to a company director, which will make them PERSONALLY LIABLE for some of the tax debts of a company. So generally, if a company director is lodging their statements on time or within three months of the due date, they're generally not personally liable for that tax debt. And if the company went into liquidation, that debt would go with the company. But with the issuance of a directors penalty notice, it does tie them in personally. And the tax office have been issuing quite a number of these, and I guess by issuing those, they've been encouraging taxpayers that if they get one of these documents, they go off and see their advisor, their accountant, whatever, and again, they're just trying to get the taxpayers to deal with these issues. What I think is particularly important, if there's anyone out there that has an INSURMOUNTABLE TAX DEBT, in other words, a tax debt that's not going down, that's either growing or staying stagnant, is that they pick up the phone and have a look at some of the different OPTIONS that are available. Because what will happen, even if that tax office haven't been in contact with those taxpayers yet, they will. It's just a matter of time. And over the next 12 months, we see this ramping up further and further, moving forward."

(And we even recently saw the tax office getting in touch and really making some demands over a small debt, and for a client who is pretty much always on time!)

And so to wrap this up, just look at all your possible options, okay?

Act early and get a PLAN B – get in touch with de Jonge Read.

Hank de Jonge: "It's just a matter of picking up the phone. Once someone makes contact with our company, we'll allocate them to one of our strategists, and the whole idea is then we'll sit down, and we'll get an understanding of that client's business, get an understanding of what they're trying to achieve, what are the obstacles, and so on. From that, we'll then provide a written advice as to what we believe will be the best option for that client moving forward. All of that front work is at absolutely NO CHARGE for the client. And like I said earlier, it's really quite good because it gives them a plan B. And we quite often get clients that meet with us, they're upset, they're scared. And after sitting down and understanding what we can achieve and what we can't, and working out what the best way forward is, there's a huge weight off their shoulders."

When I have referred clients to Hank and his team, and then I speak to them and I ask, "Have you spoken to someone from de Jonge Read?" They often are like, "Oh, yeah. And they said they could do this and that," or "Oh, they've sorted it all."

And it's just.. easy, breezy.

Now, if you feel like you're not really in any financial distress but you're not too sure where your cash flow is at, or maybe you just have a gut feel that something needs to be looked at in you accounting file, you can always reach out to me for a complimentary 15-minute chat.