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Shrinking cash reserves and the impact of inflation mean many small businesses are confronting an impossible dilemma, says insolvency specialist.
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‘Stark choice’ faces distressed SMEs: feed family or pay suppliers
16 December 2022
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10 minute read
Distressed small businesses could soon face the impossible dilemma of feeding their families or paying their suppliers as they struggle with cash flow demands and spikes in inflation, according to insolvency specialist firm Jirsch Sutherland.
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Partner Andrew Spring said cash reserves of small businesses were shrinking and cost-of-living pressures were hitting home, with default figures yet to register the full impact.
“The income of most SMEs is directly reflected by the performance of the business,” said Mr Spring. “When times are good, their personal income increases. However, when times are tough, they’re often the first to tighten their belts.
“But at what point can you no longer tighten your belt without hurting those you love? The business owner could literally be forced to make a decision between their family and their creditors.”
“SME owners have a strong emotional attachment to their business, which literally feeds their family, but if there’s not enough money each month to pay themselves after paying staff, suppliers, rent and bills, that’s a major issue.”
“There’s a real risk that credit managers’ customers may choose to prioritise paying themselves rather than their suppliers.”
The dilemma emerged from a credit professionals’ roundtable at the recent annual Australian Institute of Credit Managers conference to discuss the financial pressures being felt by customers and expectations for the next 12 months. It found an absence of a large increase in defaults was concealing problems with declining cash reserves and the impact of inflation.
Mr Spring said corporation law gave guidance on the duties of directors when confronted with this type of dilemma, but there was no simple black-and-white solution.
“The issue is that directors are often employees and therefore, they’re also creditors, because of the services they provide,” he said.
“Directors are also faced with destroying the business value entirely if they’re forced to close the doors, but to preserve value, they must also be able to support their family.”
The conference agreed that supply chain issues and unprecedented weather events were contributing to the crisis and identified several other pressure points on small businesses:
- A greater focus on enforcing trading terms and creditors securing their interests on the Personal Property Securities Register.
- Concerns with trade credit insurance, particularly in the construction industry.
- Credit professionals are digging deeper into the reasons for credit limit increases before approving them. This included reviewing customer files to ensure credit applications were up-to-date and that personal guarantees and security interests were correct.
Mr Spring urged directors to seek help at the first sign of distress to work out a viable solution and help minimise the damage to all the business’s stakeholders. “As a business, you need to put your liabilities first. And if you don’t pass the solvency test, it’s vital to seek professional help immediately,” he said.
“Complex problems require specialised and unique solutions. Financial distress is time-sensitive and solutions are often focused on loss minimisation.”
Jirsch Sutherland, which hosted the conference, provides a pro bono service for credit professionals called Insolvency Intelligence.
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