Since the implementation of PPSA (Personal Property Securities Act 2009) there has been a lot of myth and misunderstanding about the importance of it, and why every business owner needs to be across it. As accountants, there is an expectation that it should be part of the advisory process, but we are finding that it is often the last item on the agenda or not raised in the process at all.
Loans to the Business
The primary source of funding for a business owner is themselves, but very few loans are documented, and even fewer are supported with a registration. When things go wrong, this means that the loan is unsecured and that the involvement of the business owner is limited in any recovery of the assets of the business.
Getting into the habit of starting a conversation with a business owner early and regularly to have these registrations in place is a necessity in order to protect the business and the money advanced to the business.
The last thing that someone worries about is having a loan agreement prepared before they put money into their business, but this needs to be the first consideration. We have focused heavily on Division 7A loan agreements but have often not worried about following up business loan agreements.
Loan agreements don’t need to be complicated, but they do need to be in existence and should be reviewed on a regular basis.
A business owner using their credit card for business expenses is a loan to the business and should be treated like it. Having a global agreement between the business and the business owner is not a significant impost, and once the system is in place it can be easily updated on a regular basis. All too often we are dealing with business owners that have substantial personal credit card debt and whose business is in trouble, but don’t realise that getting this repaid by the business may be a serious problem.
For a new advance, a registration needs to be put in place within 14 days. If it is outside of this timeframe, the registration is not perfected for six months. If a business is in trouble, this can be the difference between protection or an unsecured advance.
We have assisted a bookkeeper recently in implementing a PPSR add-on as part of their general bookkeeping engagement, taking responsibility for the lodging of the registrations and ensuring that there is a centralised register.
Cross-Collateralising and Securing
Confusingly, business owners seem to be reluctant to secure their own loans to a business or are unwilling to have a detachment between the business assets (or debt) and their own finances. Director and personal guarantees can be a significant financial contribution and these need to be properly addressed. The underlying assets need to be protected and if something goes wrong, the business owner (and lender) needs a seat at the table. Equally, if the business owner has pledged personal assets for the borrowings of the business, they must also take secondary security wherever possible to protect themselves.
Using the PPSA to protect the position of the Director is paramount to ensuring that they are able to see through the other side of things going wrong.
Starting the Conversation
For whatever reason, we’ve seen reluctance to start a conversation about the importance of securing funding provided by the owners for the business. The rules, whilst at first glance, are complicated, with good systems and a method for communication this becomes a simple aspect of the day to day operation of the business.
PPSA is not a dirty word, and if implemented well and consistently, puts your clients in a stronger position if things go awry.
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