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Protect Your Business from Changes In Legislation Leaving Your Cashflow Vulnerable (2022)

Overview

Today we are going to look at how Terms and Conditions can protect your Business and its Cashflow from the effects of the Recent Legislation Changes that will more than likely cost your business 10s if not 100’s of thousands of dollars. It becomes a real issue when 1 or more of your clients find themselves in the unfortunate position of not being able to meet their financial obligations.

To get an easy understanding of how you can legally protect your business and its cash flow we need to look at an industry that already does this well, the most obvious of course, being the banks.

Terms and Conditions In Practice

Now I’m not trying to teach you anything you don’t already know, but when a bank extends you credit for a Mortgage or a Car Loan, they of course take out a security against that loan, so that if you don’t pay the mortgage or the car loan, they, of course, can take back the house or the car.

Now the reason I mention this is that 98% of most small to medium-sized businesses don’t know is that you can do the same thing.

Wouldn’t it make a difference to how you ran your business or managed your accounts if you knew that if one of your clients didn’t pay their outstanding accounts, you had the same protection as the banks with the maximum chance of getting paid?

Especially if you knew that you were saving your business $10’s or $100’s of thousands of dollars in potential losses.

How To Become A Secured Creditor

Now, what if I told you that it only cost you around $6.00 to have the same protection as the banks for the next 7 years. That is less than $1 per year. In fact, you use the same place the banks go to register their security when they give you that loan for a new car or piece of machinery. 

It’s called the PPSA or Personal Property Securities Act 2009. Now for 98% of you, at this point, you will be saying PPS WHAT?

For those of you who already know about the PPSR or Personal Property Securities Register keep reading, because out of the average 8 000 000 Registrations on the PPSR, it’s estimated that perhaps as many as 80% or 6 500 000 were possibly registered incorrectly and potentially invalid, which means, that if you are already using the PPSR, there’s an 8 in 10 chance that maybe those registrations need to be reviewed. 

What Is The PPSR?

Every business in Australia, and for that matter every individual in Australia, has a PPSA Registration file. It is essentially an online government Notice Board that allows businesses to register a security interest when they extend credit. It’s just like a Tax File No. every business and individual in Australia automatically has one.

You can view your own PPSR File Here. At the time of writing it costs $3.20 to do a search as an individual or as a business. But the most important aspect of the PPSA Register is that during the process of registering as a credit provider on your client's PPSR you automatically become a secured creditor.

But before you go racing off, let us have a quick look at what you need to do to take advantage of the PPSR, as failing to register can cost you 10s if not 100s of thousands of dollars. 

Now, as I said earlier it’s estimated that 80% of the 8 000 000 registrations on the PPSR could potentially be invalid, and that is because the legislation is very specific when it comes to registering a VALID, LEGALLY BINDING PPS Registration. 

Requirement To Become a Secured Creditor

The first issue is that for a PPSA Registration to be valid you need to have a written agreement between the two parties involved, (usually being your business and that of your clients), which includes the appropriate legislation giving you the legal right to place registrations on your clients PPSR file.

And secondly, that agreement must be signed by your client.

Now stay with me on this, as there are unfortunately disastrous consequences for businesses who don’t register correctly on the PPSR.

The easiest way to ensure you can legally register a valid, legally binding PPSR is to have the appropriate PPSA Legislation incorporated in your Terms and Conditions.

What Are Terms and Conditions?

Over the last 20 years whenever I talk to a business and mention Terms and Conditions most businesses will point to the Nett 7 Days at the bottom of their invoices. Of course, that is not their Terms and Conditions.

Most people when prompted will recognise Terms and Conditions as the small writing you probably see on the back of your suppliers’ invoices. Depending on the industry you operate, they usually accompany your Credit Application Forms, or for tradies, they will accompany your Quotation or Work Approval Forms. Essentially any initial form of communication you have with your clients can contain your Terms and Conditions. 

Terms and Conditions are essentially a set of rules by which you supply credit to your clients. Having a set of rules has become necessary over the years as legislation has changed. I remember in the old days you could get away with just about anything, now if you want any level of leverage with your clients, especially when it comes to collecting outstanding accounts, you need to have a legally binding set of Terms and Conditions.

Some of the standard clauses that are included in Terms and Conditions would be,

  1. Terms of Payment
  2. Cancellation Policies
  3. Default and Consequences clauses that allow you to
    • On charge collection costs
    • Charge a penalty Interest on outstanding accounts
  4. A Privacy Waiver If you are looking to Mark a Debtors Credit File
    • Stopping them from obtaining Credit anywhere in Australia for 5 years
  5. And of course, the relevant legislation legally allows you to register a PPSR over your clients when you first start dealing with them 

Now stay with me because we are getting to the interesting part which is going to have you sitting back in your seats “thinking holy smoke how did I not know about this” 

Preferential Payment Clawback

So, as we have just established having up to date, legally binding Terms and Conditions are the only way of being legally able to register a PPSR over your client’s businesses when you extend credit. 

Remembering, Number 1 you must have an agreement in writing between the two parties and Number 2 it must be signed, or else unfortunately you will fall into the 80% of all PPSA Registrations which are invalid. 

So why is failing to register or having an invalid registration so important, 

And here is the key point to this whole discussion. 

Under the PPSA legislation, there are only two camps, 

  1. A Secured Creditor (a business that has registered on the PPSR)
  2. An Unsecured Creditor (All other businesses) 

And as an Unsecured Creditor, your business is now subject to Preferential Payment Clawback

Preferential Payment Clawback is what happens when 1 or more of your clients goes into liquidation, and there’s not enough money to pay the secured creditors. IE the businesses registered on the PPSR. 

What generally happens is that the liquidator assesses the assets of the business that is going into liquidation. They then go to the PPSR and get a copy of all the secured creditors and if they assess there’s more money owed to the secured creditors than the liquidated assets of the business, the PPSA Legislation allows the liquidator to simply claw back any payments made to unsecured which they deem to have been made to preference to the secured creditors, essentially those businesses who have registered on the PPSR. 

So, let’s take a second to review what I just said, 

  • If one of your clients goes into liquidation at some point in the future
  • And the liquidated assets of the business aren’t enough to pay the secured creditors
  • A liquidator has the legal right to claw back all payments that your client has paid you in the previous 6 months. 

Now before you start saying, No That Can’t be Legal, I have a few examples to show you in a second. 

Real-Life Examples of Preferential Payment Clawback

Now before I show you these examples let me just say that I’m not going to go too much deeper into Preferential Payment Clawback, as we do have a separate Blog on PPSR, and it explains Preferential Payment Clawback in detail. Here is the Link to Google Preferential Payment Clawback, but just to show you it’s a real issue, here is two examples of exactly what happens and the Letters of Demand that are sent to businesses just like yours.


Example 1

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Now as you will notice in Example 1 we have redacted the companies details that these letters were sent to but you can see the name of the builder,

 The next thing you will see is that the liquidator is asking for the return of $171 000,

it outlined the legislation being 588FA and part of the Corporations Act 2001,

it then also outlines the 6-month Clawback Period, in this case, they call it the Relation Back Period,

It also includes the invoices, the dates and the amounts,

And then to top it all of it gives the business 7 days to pay the 171 000

Example 2

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As you will notice Example 2 is the same as the first but for a different business which outlines,

  • the amount being clawed back being $48 000,
  • the same 6-month clawback period,
  • and again, the same 7 days to pay.

 

Example 3

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And also here is Example 3 which is an extract from a 2016 / 2017 Creditors Report concerning preferential payments made to the ATO Totalling $52,636. You'll notice the ATO settled for 50,000 in the early stages of the liquidation.

Why?

Because the ATO knows that the legislation applies to them exactly the same as any other business.

So, there you have it, it’s a real thing. As I said we have a separate Blog on the PPSA and Preferential Payment Clawback which should be in the related Blogs section on this page that will provide you with all the evidence you will need.

But my job is not to scare the hell out of everyone, although after twenty years of consulting to businesses it usually does, my job is to show you how to avoid all this so that you can move forward using the legislation to protect your business.

The Good News

The good news is that it’s easy to protect your business.

Most people I talk to say “this can’t be real” or the other popular one is “Big Brother has Gone Mad”

But that is exactly the wrong way to look at this legislation.

Remember earlier I said, wouldn’t it be great if you knew that when you extended credit to your clients that you had the same protection as the banks. Because let’s face it when was the last time you heard of someone getting it over one of the banks.

Not very often, if ever.

Because the PPSA isn’t there just for when one of your clients’ files for liquidation, it’s there for every account you have difficulty in getting collected. Think about it, if you utilise the PPSA Legislation, you are a secured creditor, with the same leverage that ensures banks get paid first.

So, if you want to protect yourself from 100’s of 1000’s of $ in potential future losses, here are your three easy steps.

  1. Get up to date Terms and Conditions
  2. Get your clients onto your new Terms and Conditions
  3. Register as a credit provider on your client's PPSR’s

It’s that easy, and you can start managing your cash flow with ease, being protected from Preferential Payment Clawback.

If you like to know more about "How You Can Leverage Your Client Into Paying You On-Time" please feel free to request our FREE Facts Sheet here.  

That’s It From Me, Until Next Time

Have a Great Day

 

Company

With over 35 years’ experience Collection Consultancy Australia prides itself in offering Products and Services designed to Protect Business Assets and Cashflow. Quite often the process can start from simply making business owners aware that there is option available, through to business specific solutions and education. We are here to let business owners know that there can be a better way to secure their financial future.

Company Address

PO Box 7160,
East Brisbane QLD 4169.

Phone: 1300 565 988

Email: info@collectionconsultancy.com.au

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