As a business you must always be aware and make informed and careful decisions when dealing with other companies. This is particularly important when providing credit facility on the sale of goods and services. This article is not personal advice, simply a discussion paper on the topic.
Parent or Holding Companies and Credit
A situation to be aware of is when a trading company seeking credit from you is owned by a parent or holding company. In particular, pay attention to small businesses with one or two directors operating out of small, rented premises where the shareholder of the trading company is another company (known as a parent or holding company). ASIC company searches may reveal that the parent company has the same directors; however these directors are also the shareholders of this parent company.
In these circumstances, a relationship may develop where the trading company is a vehicle doing the day-to-day business. In time, this company may increasingly become slower and slower in paying its debts and eventually may cease paying altogether. During this period, the trading company may have made cash payments to the parent or holding company, in the form of high fees and high rental capital obligation. The profit position of the parent company may be substantial because of this and these profits may eventually be distributed to the directors/shareholders as reward for effort.
You are furious about the loss of money and you make the decision to try and recover it by instigating legal action. Unfortunately, after spending your money on the legal process you find that the company has no real assets, as the parent company has control of all capitals assets!
In many cases, the trading company has built up substantial liability; particularly with trade creditors. To illustrate this point, it’s not uncommon to receive correspondence from a receiver manager enclosing a summary of the business affairs of the trading company. You will be shocked to see the company trade debtors are shown as $120,000 while trade creditors are listed at $1,350,000. This is an obvious shortfall of $1.23 million and you are left wondering how this can happen? Why doesn’t somebody take action against the directors for insolvent trading?
Protecting Your Business
This is the unfortunate reality of doing small to medium business to business (B2B) trading in Australia. You must remain alert to the point of being sceptical or cynical of the intentions of another business in B2B relations.
It is imperative that you seek out as much detail as you can by issuing to the applicant a Credit Application Form, as well as seeking signed formal guarantees from the directors.
For example, say you are considering offering credit to a small company operating from home or rented premises, managed by a sole director/shareholder who states he or she won’t sign guarantee. In this instance you would consider this applicant as high-risk. The applicant may state that they are offering you new B2B opportunities, but you should think that they obviously lack confidence in their own business. This should put you on high-alert.
Should you decline doing business with this person?
Maybe, but first consider doing ASIC company searches and business searches. These searches cost $46.00 each and will allow you to carefully analyse the detail of the extract against the information provided in the Credit Application Form.
You may then have some further questions for the client. After all of this, if you feel you can consider the client medium risk, do your B2B deals on 7 day credit terms with minimal credit facility. If they want further credit down the track, reapproach them to sign up with a guarantee.
Catching a Liar
I spoke previously about being sceptical. Well I ask you, have you ever been aware that the person sitting across the table is lying to you? You were fortunate in this instance, but it’s the times when you aren’t aware that causes big problems. Be astute, listen carefully to what is being said. An over-emphasis on the services or goods being offered, free services follow ups or something that is too good to be true are some of the things to consider which can influence you in making the final decision.
Take the time to read the fine print in any dealings you are serious about and keep in mind it is very easy to find other B2B associates that are happy to discuss your issues and future needs.
Brodie Collection Services is one of Australia’s leading debt collection firms, with offices in Melbourne and Brisbane. They can provide ASIC search services from a low $46.50. They also provide debt collection services on a no collection, no charge basis. You can trust them with all your debt recovery needs. Visit www.brodiecollectionservices.com.au to find out more about the debt collector services that are offered by Brodie Collection Services or call us on 1300 276 343.
This information provides a general summary only and is not intended to provide specific advice for your individual circumstances. It is not a substitute for professional advice and should not be relied upon as such.