Our latest episode of Business Insights is the third in a three-part series on how SMEs can best prepare themselves for uncertainty using the 3 Ps of preparation: processes, policies and procedures, and protection.
Our guest for the series is an expert in helping businesses with best-practice preparation: Natalie Ledlin, Solicitor Director at Ledlin Lawyers.
In our third episode on protections, Natalie takes us through how to protect your business if something goes wrong with your customer, and how to take security over the assets that your customer has or that the directors might have.
Contact information: firstname.lastname@example.org
Hello and welcome to the latest episode of Business Insights. I’m Michael Pollack, head of content at CreditorWatch, and I’m joined again by Natalie Ledlin, Solicitor Director at Ledlin Lawyers. How are you going today Natalie?
I’m good Michael – hopefully your listeners aren’t sick of hearing my voice, but I’ve got some really good tips for you today.
I’m sure they’re loving hearing all this information on how to protect their businesses in this uncertain trading environment. We’re obviously experiencing the ongoing effects of the pandemic with supply chain disruptions hitting the construction industry particularly hard. More recently we’ve unfortunately had the impacts of the East Coast floods and the war in Ukraine. So I think those impacts are yet to play out in full, but we hope that they don’t hit our small business community too hard.
Natalie, could you just remind our listeners what we’ve covered in our first two episodes and what they can expect from our third P of Preparation today?
Thanks, Michael. So far we have looked at our first P which was process: what are the processes that you have for onboarding your customer, and how do you make sure that you have taken as much information from your customer as you possibly can to set yourself up for a really good trading relationship.
Our second ‘P’ was about policies and procedures, so making sure that once your customer actually is on board and you’re supplying to them you’ve got the right policies and procedures in place and that all of your staff are trained. We looked at credit policies and some information about privacy policies and data breaches. Our third and final P today is protection, so we are going to look at how to protect your business if something goes wrong with your customer, and how to essentially take security over some of the assets that your customer has or that the directors might have as well.
Okay, great. Let’s get into it shall we? Now, the Personal Property Securities Register or PPSR is an extremely important facility for any business that’s leasing or selling on credit, but it’s also very misunderstood. Natalie, what are some of the common misconceptions that you see around that?
It definitely is extremely misunderstood Michael, and I would say that there are probably a lot of lawyers out there that also don’t understand it very well! So if you are confused by the PPSA or the registration process, don’t worry, lots of people are.
One thing I would say most people get confused about is that just because the PPSA actually exists as a piece of legislation doesn’t actually mean that you have the right to register automatically. A lot of customers and clients will come to me and say ‘I really want to register my security interests,’ and I’ll have a look at their terms and conditions and they’ve got absolutely no PPSA terms.
So, you do need to make sure that you actually have some PPSA terms, and you also need to make sure that you’ve got a correct registration. So it’s kind of a two-part process: get your documentation setup, and then make sure that you’re registering. I know that CreditorWatch does have a really great program called PPSRLogic which I know a lot of my clients use to get their registrations set up. So, it’s really important to have those two things hand in hand.
Thanks for the plug there Natalie. Now, what do you need to establish to successfully register on the PPSR? There are some considerations there right?
Yeah, there definitely are and I think the first thing to do is work out whether you’re actually selling, leasing or hiring personal property. Personal property is basically anything except for land. Most of your customers out there listening today would be selling or leasing personal property, so if you’ve got that, that’s the number one thing.
Then what you’re going to need is a retention of title clause in your terms and conditions – I often see that missing from terms and conditions. This means you need a clause that says that until you have received payment for whatever it is that you’re supplying, you still retain ownership over that asset or that piece of personal property.
The next thing that you need is to make sure that your terms and conditions actually create a security agreement and a security interest. Now, those are two technical terms that come from the Act, but the number one thing that an insolvency practitioner will have a look at when they’re looking at your registration is what is the security agreement that’s actually creating that security interest, and that’s going to come from your terms and conditions. So, you do need to make sure that you have the right terms and conditions in place.
The other thing that I would say is a successful registration comes back to knowing exactly what type of security interests you have and making sure that you’ve ticked all the right boxes, so that’s where it’s really important to get the right advice about what security interests you have. A lot of the people listening out there today will probably have what’s called a PMSI – this essentially gives you first priority and puts you at the head of the queue of getting paid or getting your goods back. Generally speaking, most credit arrangements will be considered PMSI, so if you’ve got a PMSI you need to make sure that you’re ticking the PMSI box otherwise you’re not going to get that special priority.
Okay, thank you for that. Now, what about businesses that are selling services rather than goods? What are the things for them to keep in mind when registering?
Usually what I recommend to clients who are selling services is to think about how the PPSA might apply to them, and how they can actually incorporate it into their documentation. They can incorporate what’s called a general security agreement – that will give them security over all of the personal property owned by that particular customer.
That can be considered quite a big move for some clients. Some of my clients say ‘you know, that’s a bit too much for me,’ and other clients will say ‘I need any protection that I can so give me everything that you possibly can fit into my terms and conditions’. It really just depends on the risk profile that you have. If you are a business out there selling services the PPSA can still apply to you and there is still a way for you to register, but it is about making sure that you’ve got those correct terms and conditions and correct clauses in your documentation.
So, you can still get involved in the fun of the PPSA and the PPSR but you do need the right information in your documentation.
Well ‘fun’ is an interesting way to describe it. Something to keep in mind though, registration doesn’t mean automatic protection right?
Registration definitely does not mean automatic protection. You need to make sure when you are registering on the PPSR that you’re actually filling in the right information, and this goes back to what I was talking about in our very first podcast together. For people out there who haven’t listened to that, head back to the first one and check out what I was talking about in the credit application. For example, there are very specific rules around registering against trusts, companies and partnerships.
For example, if you’re dealing with a company, you need to register against the ACN of the company, but if you’re dealing with a trust, you need to register against the ABN of the trust. So, you don’t want to make a mistake in terms of who the entity is that you’re dealing with and how you are registering on the PPSR, meaning you do need to make sure that the information is all correct and that you’ve ticked the right boxes.
There are also really specific timeframes for registration and we generally recommend to clients that you make registration an automatic thing. As soon as your customer comes on board you should have a process set up where you will automatically register against your customer and then you don’t actually need to worry about whether or not you’ve made those timeframes correctly because you’re always going to be registering straight away.
Great, thank you Natalie. Obviously it’s important to consult an expert if you have any questions on that as well. Finally, could you just talk us through personal guarantees and why they’re important, and what our listeners should be aware of when setting them up?
Thanks, Michael. We always recommend to our clients to have the ability to ask for a personal guarantee. A personal guarantee is going to allow you to take action against, for example, a director of the company that you’re dealing with instead of a corporate entity. Then if you are dealing with a company that goes into liquidation, you’ve got the ability to pursue a director. Sometimes it’s a shareholder, but basically, it’s another party who may be able to pay your debt. That’s a really important backup tool that you can have.
I have a lot of clients who do things very differently – some will ask for a personal guarantee from every single customer that they deal with. Some of them will put their customers into risk profiles and they’ll only ask for personal guarantees from high-risk customers (CreditorWatch has got some good information about helping you identify the risk profile for your customer).
One thing that I also recommend that you have in your personal guarantee, since we are talking about PPSA, is to have some PPSA terms in there. Then you will have the ability to take a security interest in any personal property that that individual might have. For example, they might have a really amazing collection of classic cars that you want to take a security interest over, so you need to have those PPSA terms in the personal guarantee otherwise you’re not going to be able to register that security interest.
The other thing that I recommend (and I touched on this in our first session) was asking for personal information like bank details and personal email addresses – anything that you can use to help you when it comes to enforcing any judgement and taking legal proceedings. Lots of people have really basic personal guarantees, but there are plenty of ways that you can easily improve that documentation so that it’s actually worth the paper that it’s written on.
So much good advice there for our small business listeners. Thanks again Natalie for that comprehensive rundown. That concludes our three-part series on the 3 P’s of preparation for small business owners and I’m sure you’ll agree that Natalie has provided us with some incredible insights, so thank you Natalie once again.
No worries. Thank you Michael for having me.
For more information on properly setting up protections for your business, you can get in touch with Natalie at email@example.com or visit the website at ledlinlaywers.com.au, and we’ve included those details in the podcast description.
Well, I’m afraid it’s here we say goodbye Natalie. Thanks for the three-part series, it’s been amazing.
Thank you Michael, I hope that your customers have taken something away from that and they are welcome to reach out if they’ve got anything that they’d like to ask.
I’m sure they will, and for any more information on the PPSRLogic product that Natalie talked about earlier go to creditorwatch.com.au and there is a whole raft of information there for you. Thank you for listening, we’ll be back next Wednesday with another episode of CreditorWatch Business Insights, so please join us then.