3 warning signs your business is heading for insolvency

The rising costs of living, record low pay rises and an increasing official cash rate may see many Aussie small businesses pushed to the brink of insolvency in the coming months.

According to Michael Chan, principal and personal insolvency specialist at Jirsch Sutherland, bankruptcies could be on the cards as business costs continue to increase.

“When rising interest rates are coupled with inflationary pressures, past trends have shown a corresponding rise in bankruptcies,” Chan said. “This means that we could be heading for a personal and corporate insolvency cliff.”

Chan says market conditions mirror those from the last recession, providing the perfect storm for many businesses to go bust.

“There are distinct correlations: there was a sharp economic slowdown in the mid-90s (following the 1991 recession) when the cash rate and bankruptcies rose simultaneously; bankruptcies and the cash rate were almost in lockstep during the 2007-2008 GFC; and it’s a similar situation now.

“And while bankruptcy numbers are currently still stable and homeowners still have some savings, cracks are appearing. For example, staff cuts and recession warnings are more prevalent, the tax man is lurking and regulators are getting ready. We are already seeing a definite increase in corporate insolvencies and believe personal insolvencies will follow.”

Chan says if you’re feeling the strain of financial distress, it’s important to seek help as soon as possible.

“Financial distress can sometimes take you by surprise,” he says. “The cost of living is increasing so quickly that even if you’re currently employed, you might not be able to service your debts. Having a job doesn’t mean you’re not at risk of bankruptcy. And there are other pressures to take into consideration: e.g. with the value of homes falling so rapidly, it might put homeowners into a negative equity position, not to mention people falling off the ‘fixed-rate cliff’ when they revert to sharply higher variable rates. That’s why it’s so important to speak with your accountant or an insolvency solutions specialist ASAP to discuss options – before the pressures increase even more.”

So, what signs should you look out for?

Early warning signs for insolvency include:

1. You can’t meet your tax obligations

Failing to meet your tax obligations is one early sign. Failing to pay superannuation or PAYG tax obligations can result in a Director Penalty notice from the ATO which could make you personally responsible for those debts. If you don’t lodge BAS or Superannuation Guarantee Charge statements within three months of them being due, you will also automatically become personally liable for the PAYG tax and superannuation subject to these lodgements.

2. You can’t pay your creditors in time

If you are struggling to pay your creditors within your payment terms, you may be in danger of insolvency.

3. You’re getting demands for payment from your creditors

If your creditors are constantly following you up for payment or, worse still, you are getting letters of demand from creditors or their agents, chances are you are in high danger of being insolvent.

Chan says it’s important not to bury your head in the sand. Speaking with a specialist will help you to understand your options.

“These could include informal payment arrangements, debt agreements, personal insolvency agreements and bankruptcy – but it is crucial to understand all these options before making any decisions.”

Chan’s stern warning comes just days after the Reserve Bank again increased Australia’s official cash rate by 25 basis points – its ninth consecutive rate hike – increasing the baseline rate to 3.35 per cent.

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