At the start of the month the Small Business and Family Enterprise Ombudsman, Kate Carnell released a suite of recommended reforms to support small businesses in the post-COVID recovery phase. The ideas range from the legislation of 30-payment terms, a new industry award, a small business procurement-panel and the permanent installation of a $150k small business instant asset write-off. All with the primary goal of providing small businesses with the tools they need to get back on their feet. 

The recommended steps – particularly in terms of insolvency turnaround – are the first in a much-needed long term plan, to support small and medium businesses across the country.  

The legislation of a 30-day payment term

The reality is, cash flow is crucial to the survival of small businesses and as such, every business – no matter their size– has a responsibility to pay their accounts on time. That said, payment times are an issue that plague small businesses regardless of COVID-19. 

According to CreditorWatch data, payment times by small and medium businesses during Q1 2020 stretched out by an average of nearly 40% per cent. The increase in payment times over this period highlights the fact that businesses were suffering from cash flow problems well before the global pandemic.

While legislating a 30-day payment term for small businesses would go a long way in ensuring that SMEs can access the capital they need to continue to operate, it’s a process that is unlikely to happen overnight. Faster payment times is something that we need to work towards collectively as a sector, and perhaps in doing so, we can consider ways in which we can categorise businesses, dependent on their size, to allow SMEs to receive payments faster.

Ensuring small businesses are “fit for business”

Beyond improving payment terms, Carnell also outlined the introduction of a “fit for business” grant. The aim of which is to provide a kick-start to small businesses that have been directly impacted by cash-flow issues and provide them with a much-needed injection of capital. 

It’s widely acknowledged that issues with cash flow can have immediate and real-life knock-on effects for small business. It can be the difference between a business owner's ability to not only pay staff but also school or daycare fees. Just one payment default can have a ripple effect. In fact, if we take a look at the CreditorWatch data, it shows that 50% of businesses that incur a payment default typically go into administration within 18 months. 

Rather than subsidising small businesses over a long period of time, a one-off payment might be what’s needed to help them back on their feet. 

Permanently increasing the instant asset write-off for small businesses

As part of the initial reaction to the COVID-19 pandemic, the Federal Government introduced a $150,000 instant asset tax-write off for small businesses. As part of her recommended reforms, Carnell outlined the extension of this measure, removing the July 1 deadline and making the threshold permanent. 

While valuable, the initial increase to the measure came at a time where businesses were more focused on survival than spending. Extending the deadline and making it permanent would provide SMEs with a beacon, ensuring they can access the deduction at a more suitable stage. 

Do we need another 12 months of Safe Harbour?

CreditorWatch data shows that the number of businesses entering into administration in April and May of 2020 was down 30%, compared to 2019. That’s around 600 businesses that would have otherwise entered into administration – many of which have relied heavily on the extension of Safe Harbour laws to date. 

It is inevitable that in September, businesses propped up by the government COVID-19 support measures – as well as the current Safe Harbour extensions – will be faced with a tough decision that requires them to take a good hard look at their business and decide if it is viable. We’re more than likely to see a wave of SME insolvencies as businesses find themselves without cash or assets and in considerable debt, which means that the advocacy by Carnell of a 12-month extension on the moratorium is unsurprising.

An alternative option is to stagger the ending of the government's support initiatives. This would allow us additional time to plan for the inevitable insolvencies that will follow and give the SME sector the best fighting chance of finding some stability.

Ultimately, not all businesses will be salvageable. For those that are, however, many of the measures outlined by Kate Carnell in her COVID-19 Recovery plan will be necessary. Government support, in terms of packages like JobKeeper and JobSeeker while welcome, are not long-term solutions. We need to find measures of support that don’t jeopardise Australia’s long-term economic recovery in order to move forwards.

Patrick Coghlan, CEO of CreditorWatch