Business Dynamism, Capital & Restructuring
Business Dynamism in Brisbane: Capital, Restructuring and Knowing When to Act
What helps a business grow, transfer successfully or recover when conditions get tougher?
That was the focus of the Brisbane edition of Hermes Capital’s Business Dynamism Project, where Nick Samios was joined by Dr Mark Rainbird and Matthew Hudson for a discussion on capital, restructuring, business transition and the decisions owners and advisers need to make before options start disappearing.
The seminar took place against the backdrop of the Productivity Commission’s current inquiry into barriers to business dynamism, which is examining issues affecting businesses as they start, grow, transfer and close, including access to capital, regulatory burden and insolvency frameworks.
In Brisbane, the conversation moved quickly from policy to what is happening inside SMEs now: tighter capital, delayed intervention, underprepared businesses, governance gaps, family money going in unsecured, distressed businesses arriving too late and the difference between a business that needs capital and one that needs restructuring.
Capital is still available, but businesses need to be better prepared
Dr Mark Rainbird opened with a straightforward assessment of the funding environment.
Higher input costs, higher interest rates and tighter money mean capital providers are becoming more selective. For SMEs, that puts more weight on preparation: a clear plan, good management, a credible use of funds and a business that can explain what the capital is expected to achieve.
Mark described two very different types of businesses coming to market.
One group is growing, launching products, building facilities or making acquisitions. The other is refinancing expensive debt, treading water or trying to solve day-to-day cash flow problems.
Those situations may both require capital, but the funding case is very different.
“The money’s being more selective.”
Dr Mark Rainbird
That selectivity also means businesses that wait until funding becomes urgent are starting from a weaker position.
Mark said banks and other capital providers are taking longer to assess deals, while broader financial markets have become more cautious.
For SMEs, having the funding conversation early gives advisers more time to consider structure, debt, equity and other options rather than being forced into whatever is available at the last minute.
Good businesses can still struggle when they have no safety net
One issue Mark raised several times was the lack of a financial buffer inside many SMEs.
Traditional overdraft-style facilities are less common, leaving businesses with less room to absorb a delayed customer payment, unexpected cost, supply chain interruption or temporary drop in revenue.
That changes behaviour.
Businesses without a buffer become more cautious about investment and growth because even a relatively small disruption can create a wider cash flow problem.
“We’re seeing a lot of businesses without a safety net.”
Dr Mark Rainbird
The alternative safety net has too often become expensive short-term finance.
Later in the session, the panel discussed businesses taking on high-cost facilities with frequent repayments, then adding another facility when the first begins to squeeze cash flow.
Nick described situations where one short-term loan is followed by a second and then a third, with the new borrowing being used to service earlier debt.
That may solve this week’s cash shortage while making next month’s position harder.
Capital needs to match the problem
The Brisbane discussion repeatedly came back to the purpose of the capital.
Mark said businesses often arrive with a business strategy but no funding strategy to sit alongside it.
Debt may be appropriate. Equity may be more appropriate. In other situations, a combination of debt and equity can provide the business with enough time to reach the next milestone.
Mark described situations where debt is used as a bridge while equity is raised, rather than trying to force the entire funding requirement into one structure.
“Quite often people come to us with a business strategy, and we’re putting a funding strategy alongside the business strategy.”
Dr Mark Rainbird
Equity also takes time.
Structure, valuation and investor expectations all need to be addressed, which makes early planning important. Mark noted that businesses regularly approach advisers, decide not to proceed, then return six months later in a worse position.
By then, more options have disappeared.
Many distressed businesses arrive after the real problem started
Matthew Hudson brought the insolvency and restructuring perspective.
He said SV Partners is still seeing substantial government-initiated insolvency activity linked to legacy debts, particularly matters involving companies that have effectively been abandoned for years.
Alongside that, however, he is seeing an increase in businesses where there are assets, employees and an underlying operation that may still be worth saving.
Some of the warning signs are familiar: Director Penalty Notice risk, large tax debts, family money being poured into the business and shareholder disputes.
In several cases, Matthew said intervention has become urgent because the business owner has left the decision too late.
That delay affects what advisers can do.
A business that seeks advice while it still has cash, stakeholder support and time has more pathways available than one approaching a statutory deadline with no working capital.
Understand the business before deciding how to restructure it
One of the clearest parts of the Brisbane discussion came when Nick asked Matthew how he distinguishes between a business that should be refinanced, formally restructured or closed.
Matthew separates the underlying business from the corporate entity around it.
The first question is whether the business itself is viable.
If the underlying operation has customers, margins, assets or a realistic path forward, advisers can then work out what needs to happen to the corporate structure around it.
That may involve a business sale, voluntary administration, a Deed of Company Arrangement or another restructuring strategy.
“I want to understand: is the business viable underlying that?”
Matthew Hudson
That distinction matters because a large tax debt or distressed balance sheet does not, by itself, tell you whether the operating business is worth preserving.
Matthew also looks for warning signs in the accounts, including large director loan balances.
Those balances may suggest the business appears more profitable than it really is because the owner has not been drawing a sustainable wage from it.
Family money needs to be treated properly
Another practical issue raised during the session was family funding.
Matthew said he is seeing family members put money into struggling businesses on an unsecured basis, which can create significant problems if the company later enters insolvency.
Nick’s view was simple: if family members are putting money into a business, consider whether that money should be secured.
Matthew agreed, noting that security can be structured around existing lenders where necessary.
The wider lesson is that informal funding arrangements still need proper documentation and structure.
Money from family may feel different from bank or commercial finance when it goes in. If the business fails, its legal position becomes very real.
Small businesses are carrying a lot of responsibility with limited management depth
The panel also discussed the management burden facing SMEs.
Small business owners are expected to manage finance, operations, tax, compliance, staffing, strategy and growth, often without the specialist teams available to larger organisations.
Mark pointed to governance as one area where businesses regularly struggle.
Many owners are dealing with issues as they arise rather than working from a structured plan or having people around them who have dealt with those problems before.
That becomes more dangerous as decisions get larger.
A major equipment purchase, acquisition or expansion project can materially change a business. If the business case has not been properly tested, the consequences may not appear until after the money has been committed.
Advisory boards, experienced accountants, finance advisers and other external specialists can help fill gaps that do not justify a full-time internal role.
Restructuring is also about stakeholders
Financial restructuring is rarely only about the balance sheet.
Matthew spoke at length about stakeholder management during voluntary administrations and DOCAs.
Key suppliers, secured creditors, landlords and other stakeholders can determine whether a proposed restructuring works in practice.
Australian law does not always prevent suppliers from withdrawing during an administration, which means negotiation and communication become part of preserving the business.
In some restructures, different creditor groups may receive different treatment because certain suppliers are critical to keeping the business operating.
That can make the process more complex, but it also gives advisers tools to preserve an underlying business that still has value.
The earlier the conversation starts, the more options remain
This was probably the strongest common theme across the Brisbane discussion.
Mark sees businesses come back months after an initial conversation, by which point their financial position has deteriorated and fewer funding options remain.
Matthew sees businesses entering formal restructuring under urgent time pressure.
Hermes sees businesses with significant assets and receivables that have become overwhelmed by bank debt, tax debt and short-term finance before they arrive looking for a solution.
By that stage, refinancing alone may no longer be enough.
The better question is not simply whether more money can be found. It is what has put the business in its current position and whether the proposed capital changes that position.
That means looking at the operating business, cash flow, management, funding structure, stakeholder position and what needs to happen next.
For some businesses, the answer will be new capital.
For others, it will involve a formal restructure.
And sometimes the right commercial decision is to exit rather than continue putting more money into a business that no longer has a viable path forward.