TIME TO TAKE STOCK!
Hey, advisor! How many clients do you have with deferred mortgage and loan repayments?
At the start of this pandemic, the Prime Minister spoke about the concept of businesses hibernating. I must admit that I was sceptical about its legitimacy. After all a business is not like an animal that can store a lot of energy to then hibernate for winter. A business has customers, suppliers, relationships that must be maintained, and often debt that eventually needs servicing.
JobKeeper seems to have bridged some of the gap for payment to employees. Obviously what JobKeeper has not done is assisted with other operating costs, particularly rent and any finance debt. The 'mandatory code of conduct' for commercial tenancies assisted affected SMEs to get rent reductions and a hold on evictions from their landlords, but government assistance was never designed to help with repayments and other creditors.
Banks have been particularly accommodating by agreeing to significant deferrals of loan repayments. However, sooner or later, repayment deferrals will stop, and those financial institutions will be looking to recover their unpaid interest and principal debts. APRA's1 statistics at 30 August show that a staggering 728,335 loans had been deferred totalling $228bn; that includes 204,752 SME business loans totalling $52bn. These are eyewatering numbers to say the least, and to think interest continues to accrue on those numbers.By using an average interest rate of 5 percent on those business loans, interest of some $11bn is accruing per annum. And on 1 October, ASIC reported2 that "a significant portion of these repayment deferrals expire in September and October 2020".
Alas over the years, our experience has shown that in times of stress many small business owners tend to put their heads in the sand. We implore advisers to help their clients see the whole picture-to look at their businesses holistically. Can the client realistically afford to repay the debt that has been accumulated? What is their overall financial position? When you look at the client's position historically and holistically, can they make it through this 'malaise'?
Some clients will sail through, others will get through by the skin of their teeth, and yet others will simply not make it. That is where the advisor's role is to be independent and give the client realistic advice about their options and hopefully the likelihood of success. We at Worrells pride ourselves on delivering independent, impartial but sympathetic advice. We understand the mental and emotional tolls these dilemmas and decisions can take. If you have clients who you are concerned may struggle when their repayment moratoriums end, we urge you to seek advice from your local Worrells partner. This includes a no-obligation and complimentary consultation with the client and you as the advisor to consider their options.
Also looming is the insolvent trading moratorium's expiry on 31 December 2020. Read our article here explaining that directors who trade insolvently beyond the expiry date may not be afforded retrospective insolvent trading protection.
Given the stakes could be so high for many, what is clear is that directors and boards need to seek independent and professional advice on their situation without delay. Again, please contact your local Worrells partner to get the right advice in view of individual circumstances.
1 Australian Prudential Regulation Authority (APRA). https://www.apra.gov.au/temporary-loan-repayment-deferrals-due-to-covid-19-august-2020
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