Recruitment Insights

How bad debt protection supports you with ATO repayments

June 24, 2022
How bad debt protection supports you with ATO repayments

The Australian Taxation Office (ATO) has sent out notices to businesses indicating their outstanding debt and requesting payment. If the business defaults on ATO payments, they will issue a Director Penalty Notice (DPN) and hold the directors personally liable for unpaid debts.

The ATO made allowances for businesses these last two years in light of the pandemic’s impact, but the recent notices have surfaced debt businesses owe. If you do not have the cash reserves, repaying your debt could become a significant problem, which could worsen if your clients struggle to pay the invoices they owe to you.

The situation right now is a tricky one. One method for alleviating the impact on your business is by considering solutions such as Invoice Finance and Bad Debt Protection.

“As of the 31st of August, 2021 the ATO had issued 842,845 reminder letters about outstanding debt. By May this year, the ATO had issued warning letters to 29,552 businesses and 52,319 DPNs.”

What is bad debt?

‘Bad debt’ describes monies owed that are unlikely to be repaid. The factors causing bad debt vary, but they might include the customer going out of business, declaring bankruptcy, experiencing supply chain problems or not having the funds to repay the debt. When your clients experience these issues, it also impacts your cash flow.

It is important to note the difference here between bad debt and unproductive debt. Bad debt refers to invoices that your clients cannot pay. We might use the term ‘unproductive debt’ to refer to finance arrangements or debts that you owe.

Right now, the ATO arrears notices are surfacing unproductive debt. As companies could accrue their tax debt during the COVID-19 period, you might have accrued debt, but you could hold off paying it. The current situation means that businesses and directors stand to pay a lot of money for no return while attempting to keep the company afloat.

Zombie businesses, which manage to keep their operations running but cannot produce profit, will be among the first to become insolvent due to their debt. It is these companies that put you at risk of experiencing bad debt. If zombie companies exist within your client base and you have invoiced them, they stand to increase your bad debt due to their inability to pay your invoices.

“The ATO is currently issuing up to 40 DPNs a day and expect this number to increase.”

How does bad debt impact your business?

Bad debt reduces the cash you have available to reinvest in the business. As a result, your ability to grow and expand becomes limited with the lack of resources available to invest in new products or services, staff and tools. It also impacts your ability to secure more financing because lenders may be hesitant to fund a company with a high level of bad debt as you will become a high-risk investment. Once again, this hinders business growth.

If you have clients impacted by the ATO’s crackdown on debt, they might struggle to pay your invoices, which will stand in the way of managing your debt.

The ATO has issued their arrears notices which request that businesses either repay their debt in full or contact the ATO to negotiate a payment plan. The ATO will disclose your debt to registered Credit Reporting Bureaus (CBRs) if you still cannot repay it. Talking to the ATO about your cash flow issues will put you in a better position to repay your debt, but it will not solve your cash flow issues.

You need to take steps to protect your business from bad debt by exploring alternative payment options for your customers and considering protection against bad debts in case customers cannot pay you. By taking these measures, you can minimise the negative impact of bad debt on your operations.

“Up to 300 intent to disclose notices have been issued to businesses, with some of these already reported to CBRs.”

What is bad debt protection?

Bad debt protection is a solution that you can add to an Invoice Finance or Payroll Funding solution that you leverage to support your business. It is a protection mechanism where APositive takes on the credit risk and protects you from the adverse effects of bad debt by reimbursing you for up to 90% of the money owed that your customer was unable to pay back.

Bad debt is a challenge you might be able to mitigate at times, but it is not always avoidable. Bad debt protection is a service that can help you reduce losses and improve your financial stability. When considering whether bad debt protection is suitable for you, you should note the following benefits:

Mitigate non-payment risks

When protecting your business from bad debt, you must take a proactive approach. By taking steps to minimise the impact of bad debt, you can ensure that your business can continue operating smoothly despite setbacks experienced by you or your customers.

The flexibility of customer selection

Late invoice payments are often the first sign that you may need to assume a customer will not repay your debt. Bad debt protection allows you to select the customers you would like coverage for and only pay fees on those clients.

Ongoing industry specialist support

When you add bad debt protection to your Invoice Finance solution, you gain access to industry experts who understand how to navigate cash flow issues and the challenges unique to your industry, how to navigate conversations with the ATO and take action to protect your business.

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