If you’re running a business, large or small, one of the constant dangers to be wary of is bad debt.
Bad debt can be a hidden riptide ready to drag your business under. It isn’t just a threat to big business either – anyone engaging in commerce can find themselves affected.
Insurance specialists from BMA consulting note that when your business supplies goods to a customer, those goods are considered personal property. If you supply credit in the form of an account or until the end of a job that is classified as debt under the that if you supply goods to a client, then those goods are classed as personal property. If you supply credit on any form of account, or even until the end of a job, the Personal Properties and Securities Act (PPSA) classifies that as debt.
For businesses large or small the problem of bad debt looms equally for everyone. As the Australian Financial Security Authority’s Guide for Businesses itself says “before you say ‘nothing to do with me’ – stop!” Because it does have something to do with you.
If you’re in any way engaged in an exchange of goods or services then the bad debt is a potential hazard.
According to the annual data report by the OECD, Australia has one of the highest rates of personal debt in the world, with households struggling to manage a personal budget. Australian debt to income more than doubled in the two decades from 1995-2015 – from 104% then to 216% now.
If every Australian household has an average 8.2% of bad debt. If each Australian household owes an average of $250,000, then $20,500 of it is “bad debt.”
That’s a lot of potential customers who can cause debt problems for a business.
So How Do You Protect Your Business?
The Personal Property Security Register (PPSR) is your best launch point. This is a national, online noticeboard that shows you whether someone is claiming interest against goods or assets.
It also allows you to register a security interest over the credit you extend to your clients.
When you make a registration with the PPSR your interest in the goods you are supplying is a public record in the form of a “security interest”.
This registration means that should the worst happen and your customer doesn’t pay or goes broke, then you are in the best legal position to reclaim your goods or their equivalent value.
By taking this security interest you become a secured creditor and are protected in the event that your customers do not pay.
The upshot of being a secured creditor is that you move to the front of the line should things become dire, instead of getting little or nothing back after the lengthy insolvency process has run its course.
In contrast, unregistered creditors can expect no more than ten cents in the dollar when pursuing bad debt, registration with the PPSR improves that significantly.
Western Sydney business Richmond Kitchens and they say that getting personal guarantees from directors of your corporate customers is especially important if your company’s net assets are small.
They say, “if you don’t get paid, a debt collection agency or service should be used as a last resort. It’s more important to take security measures beforehand. If you use debt collectors, you’re running the risk of ruining your relationship with your client. And let’s be honest, it’s the situation we all want to avoid.”
But What if I’m Already Covered?
Well, your existing coverage may not be enough in the eyes of the law.
As the Australian Government points out “a retention of title clause (indicating that title remains with you until goods are paid for in full) in your contract or invoice, no longer protects you on its own.”
A standard retention of title clause doesn’t offer the full extent of protection afforded by the PPSR and someone else who is registered with the PPSR is ahead of the queue when it comes to recovering debt.
In fact, if you’re not registered then your goods may be sold by a liquidator to recover the debts of secured creditors before your own losses are even looked at.
By registering early you stand the best chance of being at the front of the queue when the debt is recovered, meaning that you stand the best chance of recovering what you are owed.
Not only that, but you’re also protected if your goods are sold on to third parties, mixed, or installed into other products.
If the PPSR isn’t part of your everyday business then that business is unprotected. Your gates are unbarred and unguarded and you run the risk of bad debt walking out your front door.
Small business owner Mark Douglas stresses the importance of ensuring you have the correct coverage, “in these difficult economic times, it’s not unheard of to have people not pay and without the right coverage you are left with nothing, investing in protection is so important and gives you a sense of security”.
So How Do I Get the Ball Rolling?
While the PPSR is available to everyone, it can be daunting to navigate on your own. Best practice would be to consult a professional who can help you register as a secured creditor and protect your business.
A credit control company can offer protection against bad debt for you or your business. If you feel uncomfortable trying to navigate the legal side of Personal Property Security then outsourcing to the professionals will save you time, money and peace of mind and allow you to be more productive at work.
This way, you will be ensuring that your PPS registrations are correct and legal before submission, and that everything is in order and that the correct documentation is in place.
As with anything, prevention is better than cure and having the right infrastructure put in place at the beginning will save a world of heartache in the unfortunate event that bad debt knocks on your door.
If you’re a business you need to be thinking about registering on the PPSR. Even if you don’t identify as a business per se, there’s a good chance that the PPSR still applies to you and will cover you in the event of a bad debt.
You’ve got everything to gain and nothing to lose by asking an industry specialist if PPSR registration can protect you.