SMEs with tax debts warned to get working capital in order

SMEs with current or future tax debts have been warned about the impact of the Australian Taxation Office’s move to share data with credit reporting agencies from 1 July.

National SME funder FactorONE has cautioned that this move could have funding and other implications for any SME facing a tax debt and experiencing cashflow pressure.

Treasurer Scott Morrison announced that the ATO plans to disclose tax debt information to credit reporting bureaus from the new financial year.

According to FactorONE’s head of debtor finance Wayne Smith, the Federal Government’s reasoning is that this move will assist in providing businesses with a more complete credit risk assessment, and help credit managers to identify businesses at high risk.

“While this increases the level of disclosure, SME owners need to be aware of the impact this move could have on their business,” Smith said.

The ATO will disclose to credit reporting bureaus the tax debt information of businesses who have not effectively engaged with the ATO to manage their taxation debts.

It is anticipated that initially this will only apply to businesses with Australian Business Numbers and tax debt of more than $10,000 being at least 90 days overdue.

Bank funding may freeze up for small business with tax debts

“This move is likely to have an adverse impact on the credit appetite of the traditional sources of small-business funding, and may also make it harder for SMEs to retain credit insurance limits,” Smith said.

“It is also likely to impact on trade credit, meaning where a business could gain trade credit previously, it may not be as readily offered or terms will not be extended, resulting in a potentially significant impact on cashflow.”

Wayne Smith’s four-step plan to minimise adverse effects from credit reporting change are as follows:

  • Ensure tax affairs are in order – Business owners and managers need to have a full understanding of their tax position, and should take steps to ensure tax arrears are avoided, or paid down. Ignoring these debts can impact on credit ratings and an SME’s future prospects of gaining business finance.
  • Communicate with financiers and suppliers – As the impact of this reporting change could be significant, maintaining strong relationships with financiers and suppliers is crucial. Consider how you can adapt your business to any supplier credit tightening (you may need to change your own terms of trade with customers).
  • Take a close look at your credit insurance requirements – Credit reporting agencies having access to additional data may lead credit insurance providers to reprice their products or decrease your limits. Reconsider your needs to ensure you are not exposed to a higher level of trade risk.
  • Look for alternative funding sources – It may be prudent to diversify your SME’s funding sources, and explore options in existing funding limits are reduced or withdrawn.

Inside Small Business

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