The PPSA for Dummies – Business Loans. Ignore the PPSA, what could possibly go wrong?
Simon Read, founder of PPSAdvisory, is helping unravel the mystery of the PPSA, detailing why it’s so critical you appreciate its application for your or your client’s business.
It’s a big topic so we’re breaking it down into “bite sized” pieces, identifying the five principle ways in which the PPSA is likely to have application to Australian businesses:
- Business loans;
- Selling goods/materials on credit to your customers
- Leasing or renting equipment to customers
- Asset protection structures
- Buying/selling businesses
Remember, the PPSA is all about security; if you have security you better register it on the PPS Register if you ever want to rely on it.
You also know how hard it is to get a loan from a Bank without a sufficient level of security and if you do get the facilities, the Bank will get security over all your business and often personal assets.
Why should you be any different? Borrow money from a Bank and you’ll sign a loan agreement and have to provide security. Often in business, you create a loan but don’t document it and usually don’t bother with security. Why not?
These are just some of the everyday examples we see:
- Shareholders or Director’s lending money to their business;
- Relatives lending money to each other, their businesses, their children’s/grandchildren’s businesses;
- Friends lending money to friends;
- Business to business loans (particularly related party loans).
Often these loans go undocumented, unsecured and almost always, aren’t registered on the Personal Property Securities Register.
There is one, monster reason to document, secure and register your loans. It’s asset protection ‘101’. It’s step one in protecting your assets, particularly family assets.
If I slip my liquidators ‘hat’ on I’ll show you a very typical example:
- Newly marrieds, Jan and Bob have borrowed $250k from their parents to start their new business.
- They’ve acquired machinery and several delivery vehicles.
- They’ve been trading for 3 years when their marriage collapses, Bob falls sick, business falls off and suddenly they are in financial trouble.
- Realising the problem, the owners appoint Voluntary Administrators.
- The financial position is not good – with liabilities of over $600k and assets of only $200k, creditors will be lucky to get back 25 cents in the dollar.
The two scenarios for the parents are:
- Rank as an unsecured creditor with all the other creditors and recover a quarter of their money; or,
- Rank as a secured creditor with priority over the other creditors and recover around three quarters of their money.
And the difference between the two scenarios? A loan document incorporating security and for good measure the registration of the security on the PPS Register.
It’s just good business sense. Protect your stake.
But it’s just another job, there’s the legal documents, setting up on the PPS Register and the hassle of registration. Not anymore.
Speak with your accountant about Credi.com or go directly to their website and you can have an electronic secured loan agreement executed and fully registered in 24 hours, all at a very reasonable price.
Please remember this is not legal advice, we are not lawyers and the information is provided for general guidance only. Readers should obtain confirming legal advice before acting.