In its Small Business Risk Review released in late 2019, commercial credit reporting bureau CreditorWatch found that court actions due to payment defaults in the construction sector had increased by 40 per cent between the second and third quarter of 2019.
Businesses exposed to this sector continue to face the risk of insolvency, with the latest casualty being national building supplier SWC Management Group entering voluntary administration with debts of almost $70 million. While it’s helpful to remain aware of the current economic climate, especially as the construction industry shows signs of continuing softness, it’s a timely reminder for the need to be proactive and prepare your business to weather challenging economic times.
Being proactive is key in the current environment
For businesses in the property and construction sector, it is crucial to be diligent about the financial and legal foundations throughout all stages of projects.
The actions that your business takes will vary depending on your place in the supply chain, but generally, the following steps are a good place to start:
- focus on cash flow
- be diligent about payment terms
- manage debtors quickly once they’re outside payment terms
- check how contracts for your business assets are structured.
Across all sectors, cash flow is key for the health of your business. Be proactive with your cash flow by regularly reviewing your payment terms, cash reserves and your ability to service debt in a range of business environments. You should also review your current business structures and finances to consider:
- how your risks and wealth are segregated;
- which entities or individuals have provided security or guarantees to support loans; and
- how you would access more funds should cashflow become tight.
Review payment terms
As you’re completing cash flow projections, review your payment terms for all projects. Credit stress can cascade in several ways, so you need to be aware of how the contracts are structured for each project. Further, the fallout of a business’s failure has the potential to impact down-stream suppliers of goods and services in ways they might not be prepared to manage, so it’s wise to assess these potential impacts and how they may affect your business too.
Manage debtors quickly
The sooner aged receivables are followed up, the more likely you are to recover the payment. Ensure you have a process for collecting payments as soon as a payment becomes overdue. Completing thorough due diligence on clients before starting a project will also help to filter out clients who are unlikely to pay.
If you are a supplier within the construction industry and you provide goods on retention of title (ROT) terms, should a struggling customer ultimately collapse into a formal insolvency appointment, you may not be entitled to recover your goods unless you have registered your interest as a secured party of the customer on the Personal Properties and Securities Register (PPSR).
Review contracts for business assets
If your business leases out equipment, you may also be required to register your interest over the lessee on the PPSR.
The method and details behind the registration are crucial as an error can render your security invalid, risking the loss of your equipment (or goods, where supplying on ROT) should the lessee’s business fail.
While the points above are essential for businesses in the property and construction sector, being proactive about your business’s financial and legal foundations is applicable across all sectors. Further, being proactive now could be the key to ensuring your business is positioned to weather challenging economic times.
Gavin Debono is a Private Business and Family Advisory Partner in our Melbourne firm. As a member of the Property and Development Industry Team, he works closely with property development and construction clients. If you would like to discuss your situation, do not hesitate to contact him on +613 8610 5331.
Damian Pearce is a Client Director in Pitcher Partners’ Business Recovery and Insolvency Services division.
The services operate nationally, with experts in Melbourne, Sydney, Perth, Adelaide and Newcastle, specialising in advising companies or individuals navigating turbulent financial times.
For more information on Pitcher Partners’ recovery, turnaround and insolvency capabilities, click here.