Business Dynamism, Finance & Financial Stress
Business Dynamism in Practice: What Is Getting in the Way of Australian Businesses?
What stops a business from starting, growing, investing or recovering when it comes under financial pressure?
That question sits behind the Productivity Commission’s inquiry into business dynamism and was also the starting point for the Melbourne session of Hermes Capital’s Business Dynamism Project.
Nick Samios was joined by David Gandolfo and Jeanine Purdie for a discussion that moved well beyond policy. The conversation covered access to finance, ATO debt, late-paying customers, short-term lending, regulation, business confidence, restructuring and the role advisers play when businesses begin to come under pressure.
Again and again, the discussion came back to the value of identifying problems early and understanding what is driving the pressure before adding another layer of debt or waiting for conditions to improve.
What is getting in the way of business?
David Gandolfo spoke about his involvement with the Productivity Commission’s business dynamism consultation and the areas he expected to see examined, including regulation, tax, uncertainty and the practical barriers businesses face when trying to start or grow.
For businesses and their advisers, those issues quickly become practical.
Can a business access the capital it needs? Are customers paying on time? Is ATO debt becoming a warning sign? Is a short-term facility solving a temporary problem, or delaying a bigger one?
The Melbourne discussion looked at those questions from several angles, drawing on experience across finance, credit management, collections and business ownership.
Late payments are often an early warning sign
For Jeanine Purdie, changes in payment behaviour provide useful information long before a business reaches formal insolvency.
A customer who once paid within seven or 30 days may move to 45 or 60 days. A payment arrangement is agreed to and then missed. Calls stop being returned. Suppliers start to notice that certain creditors are being paid while others are pushed further down the list.
Jeanine said businesses are seeing more customers prioritising essential payments while delaying expenditure they regard as discretionary.
Her advice to business owners was practical: know who owes you money, invoice promptly, follow up and pay attention when established payment behaviour changes.
“Early intervention is the best intervention.”
Jeanine Purdie
She also suggested making debtor management part of the working day rather than waiting until outstanding invoices have become a serious cash flow problem.
Long payment terms do more than delay cash coming through the door. They increase the amount at risk if a customer subsequently fails.
Access to finance can matter more than the interest rate
Interest rates were another obvious topic, but David made an important distinction between the experience of consumers and businesses.
When Nick asked whether the bigger issue for small business was the cost or availability of finance, David’s answer was clear: availability of funds.
For a business considering an investment, the cheapest interest rate is not always the deciding factor. The commercial question is whether the finance allows the business to make an investment that produces an adequate return.
David used the example of financing specialised equipment at a higher rate because a major bank would not fund the transaction. If the equipment is necessary for the business to operate or take on profitable work, the alternative of not proceeding also has a cost.
“What’s the cost of not doing the deal?”
David Gandolfo
Australia’s broader non-bank and private credit market has created more funding choices for businesses that fall outside traditional bank lending criteria.
More available finance also places more responsibility on the business and its advisers to understand how and why the funds are being used.
Another loan will not fix the wrong problem
One of the strongest parts of the discussion concerned businesses using short-term finance to address ongoing cash flow problems.
Nick described situations where a business takes out short-term finance, begins making frequent repayments, finds itself under greater cash flow pressure and then takes another facility to cover the shortfall. That process can continue until several loans are stacked on top of each other.
Short-term finance has a legitimate role. David pointed out that the relevant question includes the opportunity cost of not obtaining the money. A higher-cost facility used for a short period to complete a profitable transaction is very different from repeatedly borrowing to cover an unresolved operating problem.
Jeanine raised the same issue from another direction: does the business genuinely need the finance, or is it delaying a problem that still has to be dealt with?
Her approach is to look at the wider position, including costs, other creditors, collection activity, statutory debts and what is happening across the business rather than treating one overdue account in isolation.
For brokers and advisers, David argued for the same broader view. Understanding cash flow, tax, inventory, wages and future funding requirements matters when advising a business. He recommended looking beyond the immediate transaction and considering what facilities and capital the business will need over the next three to five years.
ATO debt needs to be considered in context
ATO debt generated considerable discussion in the room.
David noted that a business may be required to repay existing tax debt while also remaining current with new obligations, which adds pressure to cash flow. In the right circumstances, refinancing that debt over a longer period may give the business more room to operate, provided the underlying business remains viable.
The panel also challenged the assumption that tax debt automatically means a business is approaching insolvency.
The more useful questions are why the debt arose, whether the business can service it and whether the original cause has been addressed.
During the audience discussion, participants raised another concern: funding tax debt without making changes elsewhere in the business can hide deeper problems and, in certain cases, move risk onto assets such as a director’s home.
Finance needs to sit within a broader plan, rather than becoming the plan itself.
Business owners tend to wait
There is also a human element that does not appear neatly on a balance sheet.
David described business owners as inherently optimistic. That optimism is part of what drives people to start and run businesses, but it can also make it harder to recognise when conditions have changed.
“Business owners are inherently optimistic, otherwise they wouldn’t go into business.”
David Gandolfo
A business may keep operating on the assumption that sales will improve, customers will pay or conditions will turn around, even as warning signs accumulate.
Jeanine sees that from the collections side. An invoice moves from a promise to pay next Friday, to unanswered calls, to a dispute and eventually, in the worst cases, to insolvency.
By then the options available to both creditor and debtor have narrowed considerably.
Early advice does not automatically lead to restructuring or insolvency. Depending on the circumstances, the answer may involve finance, changes to costs or operations, better debtor management, restructuring advice or a combination of specialists.
The important part is understanding what is happening inside the business and what needs to change.
Business finance works better when it starts with the business
Towards the end of the session, David was asked what advice he would give finance brokers working with small businesses.
His response was to move away from a purely transactional approach.
“You’ve got to provide the best possible outcome, and that isn’t about solving one problem or doing it on a transactional basis.”
David Gandolfo
A finance facility should form part of an overall strategy for the business rather than address one isolated problem. That requires advisers to understand the business, its plans, its cash flow and the pressures it is facing.
Nick made a similar point from the lender’s side. Before Hermes takes additional risk, the team wants to understand what caused the current position. Tax debt, cash flow pressure or an urgent need for working capital may be visible symptoms. The work lies in establishing what happened underneath them and whether the finance being proposed addresses it.
That may require a broker, accountant, restructuring adviser, insolvency practitioner or lender to involve another specialist rather than trying to resolve every part of the situation themselves.
For businesses under pressure, that broader view leaves more room to make deliberate decisions while options are still available.
Watch the full recording to learn more.
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