According to Australian tax commissioner Chris Jordan, businesses collectively had $26.6 billion worth of tax debt as of October 2019, the vast majority of which is due to tax underpayments by small and medium sized enterprises. Though they have already faced significant criticism over their aggressive tax repayment plan, the government is continuing to put more pressure on businesses to pay up. Despite their ongoing efforts over the past several years, they have been relatively unsuccessful. Tax avoidance and underpayment continues to be a growing problem.
To combat the issue further, Parliament has now passed the Treasury Laws Amendment Bill 2019, which will allow the ATO to disclose tax debt information to credit bureaus. This will impact the ability of affected businesses to access financing. In order to pay their outstanding tax debts, however, businesses need to continue to find ways to fund growth. Fortunately, off-balance sheet financing may provide the answer.
The most vulnerable businesses are those who can least afford it
The ATO will not simply disclose all tax debts to credit agencies. Rather, it will do so selectively , targeting those businesses who owe more than $100,000 dollars which are overdue by more than 90 days. Moreover, those who “engage with the ATO to manage their tax debts” or who are legally disputing those taxes will not have their debt information disclosed.
While this sounds encouraging, many businesses aren’t able to service their sizeable tax debts, and can’t meaningfully engage with the ATO with regard to payment. After Australia’s 2019 housing crunch, many companies that were already struggling now lack the funds to begin paying down tax debts. Disclosing their debts to credit agencies will seriously impact their ability to borrow funds, and to attract much-needed investment. As a result, collecting outstanding tax payments promises to become that much more difficult for the ATO.
Businesses need to drive growth despite impacted credit
In order to make up outstanding tax payments, businesses need to find ways to boost revenues, which means driving growth. This, in turn, requires yet more funding. In order to qualify for loans, and to help attract the investment they need, businesses need to clean up their balance sheets, and do everything they can to avoid the disclosure of their tax debts. A great way to do this is to use of off-balance sheet financing, which allows businesses to access funds without taking on any new liabilities.
Businesses often have all the assets they need to run their business. The problem is just the liquidity of those assets, such as their outstanding invoices. Long client payment terms—often compounded by late payment—mean that businesses are forced to wait on revenues that they have already earned. Invoice finance solves this problem elegantly. Instead of waiting for payment, the business can simply trade an outstanding invoice for cash. The financial institution receiving the invoice issues most of the outstanding payment up front, and then goes on to collect from the client on its own. After the payment is received, the business receives the rest —minus a small fee.
Supply chain finance
Another way to come up with additional working capital is to extend your own payment terms. Supply chain finance allows businesses to do this, by working with their financial institution to extend payment to suppliers on their behalf. When a supplier payment is due, the financial institution makes the payment, while allowing the paying business to defer payment to it by up to 90 days from the issue date of the invoice. In the meantime, the business can put those funds to other uses, such as growth investments, or paying down tax debts.
Most importantly, neither supply chain finance or invoice finance require businesses to take on any new liabilities. Rather than borrowing any funds, they are either delaying payment on an existing liability, or liquidating an existing asset. This means that these cash flow solutions don’t need to be listed on the business’ balance sheet.
By strategically applying these tools, businesses can improve their short term cash flow management in a way that makes their long term success much easier to attain. Businesses can use them to free up the capital they need to engage with the ATO and begin servicing their tax (or any other) debts. At the same time, they’ll be able to improve their overall cash flow management, making it easier to qualify for loans, and to attract investors.
Off-balance sheet financing doesn’t make your business more profitable or more successful in the long run. Instead, it provides you with the tools you need to deal with short term challenges, while also clearing the way for your business’ future success.