Boutiques should consider common credit facilities, stimulus initiatives and tax exemptions to help ease working capital and boost the firm’s sustainability, writes Anthony Hersch.
SME law firms continue to be affected by reduced turnover and corresponding capital constraints as COVID-19 universally affects business. This industry disruption correlates with the recent Australian Bureau of Statistics survey on Business Impacts of COVID-19, which identified that 72 per cent of Australian businesses incurred a decrease in revenue resulting from the pandemic.
However, on the upside, credit is currently “cheap” and readily available through multiple traditional financial institutions, as well as an increasing volume of bespoke fintech lenders. The end of the financial year is an ideal time to take stock and proactively plan for the year ahead (preferably in conjunction with an accountant).
Here is an overview of common credit facilities that may be considered to ease working capital and contribute to the firm’s sustainability:
- Business line of credit
Often also referred to as an “overdraft”, a line of credit is a credit facility provided by a lender that enables access to a set amount of funds, when required. It’s good practice to have a line of credit as a contingency.
- Business loans
Business loans vary in size, term, and interest charged (which is largely determined by risk). Business loans will either be “unsecured” (no asset required to obtain the loan) or “secured” (typically requiring a property to secure the loan). A business loan is preferable to drawing capital from your property or using a personal credit card with regard to exposure and cost.
- Invoice finance
Also known as debtor finance or factoring, invoice finance is a way for businesses to borrow money against the amounts due from customers. The percentage able to be borrowed depends on the value of outstanding invoices, customer profiles, and nature of the business.
- Asset finance
Asset finance is a specific type of lending that releases funds to purchase or lease equipment, machinery, and vehicles (new or used). Funding is structured based on the anticipated asset lifespan, cash flow availability, and company requirements.
- Disbursement funding
Disbursement funding is a deferred payment structure that allows the law firm to postpone payment of third-party costs until settlement (such as medico-legal and expert reports). This facility enables cases to progress without being obstructed by the need to finance third-party costs upfront.
In addition, law firms should be aware of the government-backed stimulus initiatives and tax exemptions, to include:
- Instant asset write-off
The instant asset write-off threshold has been increased to $150,000 and expanded to include businesses with aggregated annual turnover of less than $500 million. The instant asset write-off applies until 30 June, 2020 (and has been tabled to be extended to 31 December 2020).
Eligible employees receive a fortnightly payment of $1,500 until 27 September, 2020. Sole traders and other entities may also be eligible.
- Cash flow boost
Through the Australian Taxation Office (ATO), the government will provide tax-free cash flow boosts of between $20,000 and $100,000 to eligible businesses. The amount is aligned with tax withheld from employee wages and will be delivered through credits when activity statements are lodged.
- Business loan subsidies
The government will provide a guarantee of 50 percent to SME lenders for new unsecured loans to be used for working capital.
- Backing business investments
Businesses with a turnover of less than $500 million will be able to deduct 50 per cent of the cost of an eligible asset on installation, with existing depreciation rules applying to the balance of the asset cost.
- Temporary relief to distressed businesses
There is a temporary increase to the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond. This includes temporary relief for directors from any personal liability for trading while insolvent, and providing temporary flexibility in the Corporations Act 2001 to provide temporary and targeted relief from provisions of the act.
- Early access to superannuation
Eligible persons can apply for up to $10,000 of their superannuation before 30 June 2020. They can also apply to access up to a further $10,000 from 1 July 2020 until 24 September 2020.
- Commercial tenant rent relief
This includes a temporary hold on evictions and a mandatory code of conduct for commercial tenancies to support SMEs affected by coronavirus.
- Increased and accelerated income support
A supplement will be paid to existing and new recipients of the eligible payment categories, and will not be income tested.
- State and territory grants and assistance
A host of individual state and territory initiatives are outlined in the Australian government’s coronavirus response section.