Sometimes it Creates More Problems Than it Solves
Is your business struggling financially right now?
If it is, you could be experiencing what’s known as pre-insolvency.
Pre-insolvency is a period of time where things are tough and tight, but you’ve not yet hit insolvency as you can still pay your debts when they’re due.
If you’ve already taken steps to address your financial issues but aren’t seeing much improvement, you might be keen to get professional pre-insolvency advice.
However, if you’re considering engaging a pre-insolvency advisor, just be wary - they can create more issues than they solve.
What Does Pre-Insolvency Look Like?
Businesses can struggle financially for many reasons, including a decline in business, an increase in expenses or an accumulation of debt.
These past few years have certainly not been conducive to profitable times for many businesses and industries, so you’re not alone.
Some of the common signs of pre-insolvency you may be experiencing include:
- Decreased revenue or profitability
- Difficulty paying bills on time
- Increased debt or loan defaults
- Decreased cash flow
- Difficulty meeting financial obligations
- High levels of inventory or slow-moving stock
- Reduced demand for products or services
- Management conflicts or increased turnover
- Lawsuits or other legal action
- Reduced investment in future growth or projects
Dealing with some or many of these can be daunting and time-consuming, which is where pre-insolvency advice can help.
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What Is a Pre-Insolvency Advisor?
A pre-insolvency advisor or consultant is a professional who provides pre-insolvency advice and guidance to individuals or companies facing financial difficulties. They can help you evaluate your financial situation and assess your options, such as negotiating with creditors and restructuring your debts.
The goal of a pre-insolvency advisor is to help you find the best solution for your financial problems and prevent you from facing bankruptcy and insolvency.
Insolvency advisors come from a range of backgrounds, including;
- Public practice accountant
- Chief financial officer or finance manager
- Lawyers who specialise in insolvency
- Generic financial advisors
- Insolvency practitioners or liquidators
The Problem With Pre-Insolvency Advisors
While pre-insolvency advisors can be a useful resource for those facing financial hardship, it’s important to be cautious when seeking their services.
Some pre-insolvency advisors may make unrealistic promises or charge high fees for their services, which can create more problems for you rather than solving them.
In some cases, pre-insolvency advisors may encourage drastic measures, such as transferring assets or entering into Part IX (9) Debt Agreements that may not be in your best interests. This can lead to further financial difficulties down the line and may ultimately result in bankruptcy or insolvency, despite their initial intentions.
Some pre-insolvency advisors can be illegal phoenix operators. This means they advise struggling businesses to transfer assets out of their company into a new company for less than the market value before winding up the original company.
The issue here is that creditors don’t get what they’re entitled to, and, as a business owner, you’re the one who will face the legal consequences, not them.
An Under-Regulated Area of Law
Unfortunately, if this happens, you have little comeback, as pre-insolvency advice is an area of law that’s relatively under-regulated in Australia.
While a range of codes of ethics and professional standards may apply, they only apply if the individual is a member of a specific profession or association, for example, the Australian Restructuring Insolvency and Turnaround Association (ARITA) or CPA Australia.
For example, ARITA’s Code of Ethics states members must exhibit the highest levels of integrity, competence, objectivity, and impartiality and uphold the standards of behaviour.
Qualities of a Good Pre-Insolvency Advisor
Delivering sound pre-insolvency advice isn’t easy.
A competent pre-insolvency advisor looks at both your personal circumstances as a business owner (asset protection) and the viability of your business before coming up with a strategy.
In fact, insolvency advice is a multi-disciplinary exercise that demands law, accounting and general entrepreneurial expertise.
Therefore, if you go down the route of engaging a pre-insolvency advisor, it’s important to research their background and accreditations thoroughly. In addition to this, make sure you carefully consider any advice or recommendations they provide.
It may be prudent to seek a second opinion from a financial professional, such as an accountant or lawyer, before making any major financial decisions.
The Right Advisor Solves Problems
If your business is experiencing financial difficulties, early action is always the best type of action. However, it has to be the right action, or you risk sinking yourself and your business into deeper water.
If you think pre-insolvency advice could work for you, just be careful, especially if your advisor promises the world.
A turnaround and insolvency specialist is your best option, as they have the holistic skills, knowledge and qualifications needed to deliver pre-insolvency advice that does what it’s supposed to do: solve problems, not create them.
If your company is struggling financially, see how we can help with our Instant Online Assessment, or get in touch with our team of specialists today on 1800 861 247 for support, advice and to discuss your options.
