In Australia, small businesses account for almost 98% of all businesses, contribute to 35% of our GDP, and employ 44% of our workforce. However, more than 60% of small businesses fail within the first three years. To safeguard against this, SMEs have to adequately manage their credit risk and protect their security interests. How does Read More…
PPSR and SMEs: An introduction to protecting your small business
Tue 11 February 2020 - 12:29 pmFinance
In Australia, small businesses account for almost 98% of all businesses, contribute to 35% of our GDP, and employ 44% of our workforce. However, more than 60% of small businesses fail within the first three years. To safeguard against this, SMEs have to adequately manage their credit risk and protect their security interests.
How does one maintain low credit risk? Many business transactions are conducted on credit – i.e. when products or services are provided without receiving payment first. Examples include goods and assets like machinery, crop, livestock, equipment, and intangible items like intellectual property and financial property like shares.
When choosing a supplier or deciding to onboard a new customer, it is essential to assess their credit risk and protect your assets which you’re delivering on credit. If your customer or supplier liquidates, where do your assets go and how will you claim your debt?
This article explains how SMEs can protect their credit risks and security interests with the PPSR.
Introducing the PPSR
The PPSR (Personal Property Securities Register) helps businesses manage their credit risk, protect their goods and assets, and recover debt in the event that their customer becomes insolvent or liquidates.
According to the Australian Securities and Investment Commission (ASIC), 7498 Australian businesses went into insolvency administration in the 2018-2019 financial year. If your business isn’t already on the PPSR, it’s time to do something about it.
The PPSR is a national database that lists all the security interests a business has and was formed in 2012 as a result of the PPSA (Personal Property Securities Act 2009). It benefits any business that supplies goods on credit terms; leases, rents or hires out goods; or accepts personal property as security for outstanding debt.
The PPSR was a welcome introduction to help businesses protect their financial interests. However, the system isn’t perfect. The PPSR is notoriously complicated and time consuming to navigate. Also, most SMEs are unaware of its existence. Businesses that aren’t taking advantage of the PPSR pay a high price when their customers or suppliers face liquidation.
Isn’t the Retention of Title clause enough?
Unfortunately not! In the event of a liquidation, the administrator will review the register and prioritise assets accordingly. If your goods are on the PPSR, your debt will take priority over unregistered debtors. Otherwise, you will be competing with all the other unsecured debtors and it is often impossible to claim anything at all.
The flow on effect hits SMEs the hardest
When a customer or supplier liquidates, SMEs experience a greater flow on effect in terms of financial loss, and therefore face a bigger risk of being pulled down together. SMEs generally have fewer resources, more volatile revenues, and lower survival rates compared to larger corporations. As a result, it is usually more difficult for them to recover compared to larger businesses. Such financial volatility increases their credit risk.
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