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Small businesses may be treating the tax office like a bank - but it's a stop-gap measure, warns national SME funder. Rather than run up ATO or credit card debt, there are smarter solutions for SMEs.

MANY small businesses may be using the Australian Taxation Office as a line of credit because they are unaware of alternative business funding solutions or they believe it is too hard to arrange formal commercial finance facilities, according to national SME finance specialist Scottish Pacific.

Scottish Pacific CEO Peter Langham said SMEs may not be aware of how they can use invoice finance not just to help pay their ATO obligations but to grow their business.

Mr Langham was commenting on a recent Inspector-General of Taxation's report that found the ATO was owed $35.3 billion in 2013-14, up 9.7 per cent on the previous financial year.

The ATO figures indicate small businesses are the main offenders for late payment, accounting for 60 per cent of collectable debts (micro businesses with turnovers under $500,000 make up three-quarters of the small business debts).

"It is an astronomical amount the ATO is chasing. Given the size of the debt, the ATO is likely to make it much tougher for small businesses to run up debts in future, so it's a great time for SMEs to look at better ways to improve their working capital," Mr Langham said.

Anecdotal evidence that the ATO is ramping up actions to wind up non-payers means SMEs and their directors who delay paying their ATO debts are on a dangerous path.

"Of those SMEs not paying their ATO debt, there are undoubtedly many viable businesses that have just not managed their working capital well," he said.

"Getting the right commercial finance to support your business - and help it thrive, not just survive - is really not that onerous. There might be a few more forms to fill in, but you'll end up with working capital to fund business growth."

SME alternatives to running up an ATO debt

While some businesses turn to overdrafts and loans, invoice finance can provide a more flexible funding solution. Invoice finance can be used as a line of credit linked to and secured by your outstanding accounts receivable, or a more short-term come and go facility, turning invoices in to cash.

"We have seen examples of businesses with tax debts in excess of $1 million, with the ability to borrow $2 to $3 million against outstanding invoices, but have chosen not to arrange a legitimate commercial finance facility. Businesses in this situation can raise more than enough working capital to pay down their tax debt and inject further funds into their working capital," Mr Langham said.

"While SME owners are busy people, the danger of putting things in the "too hard" basket and running up a tax debt until it is called in, puts risk on the business and the business owner could ultimately become personally liable for the company debt.

"We've also had cases where clients, before they found a debtor finance solution, were using personal credit cards to cover business expenses because they find that "easier" than spending a day or two seeking a permanent solution. This is really only a stop-gap measure.

"Our message to SMEs is don’t use the ATO for convenience purposes, because while it might seem like a short-term fix for your cash flow problems, it's just delaying the inevitable and it's doing nothing to provide your business with the working capital you need to thrive," he said.


AT A GLANCE


Reasons why small businesses should not run up ATO debts

• Arrears may be tolerated to a point but it is unauthorised and not legitimate credit
• Puts you on the ATO radar as a slow/bad payer
• Creates a debt that directors can become personally liable for
• Not a reliable line of credit: the debt is repayable on demand with no guarantee that an arrangement will be offered
• Default rates of interest are applied to the debt
• Makes the ATO a creditor relationship you have to manage
• The ATO can and do issue winding up petitions to businesses that build up unauthorised arrears and don’t meet repayment arrangements

Alternative lines of credit for SMEs

• Selective invoice finance - this can be a great way to release funds and improve the working capital available to fund the business. Once the facility has been approved, it is available on an invoice by invoice situation as the business needs it. Great if you want flexibility; also suits seasonal businesses.
• Invoice finance - Unlike a traditional bank overdraft there is generally no need for real estate security, and you can't over-borrow because you only borrow 80% of what you are owed.
• Overdraft – Probably the most common form of funding for business owners who are able to provide real estate security with sufficient equity to support the required limit.
• Trade Finance – Facilities can be secured or unsecured, enabling a business to acquire stock domestically or internationally and pay the majority of the balance once they have had time to sell the product.

For more information about Scottish Pacific, phone Chris Bhagwan on 1300 332 867.

Media contact: Kathryn Britt, Cicero Communications, Tel: 0414 661 616,

Scottish Pacific Business Finance Pty Ltd provides working capital solutions to SMEs, offering the broadest range of trade and debtor finance solutions in Australasia. With more than 1000 clients in industries including manufacturing, transport, wholesale, import, labour hire and printing, Scottish Pacific handles more than $6 billion of invoices each year, providing funding lines exceeding $500 million. Established in 1988, Scottish Pacific has full operations centres in Sydney, Melbourne, Perth, Brisbane, Auckland, London and China.

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