Episode 50: Protecting your business
April 11, 2022
We so often talk to business owners about protecting their personal assets from any risk associated with owning a business. In this episode we focus on how to protect your business and business assets. Sarah and Trudi explain the basics on the Personal Property Securities Register (PPSR) (https://www.ppsr.gov.au/) and how and why you should use it to protect certain assets. They also chat on the various types of insurance available to business owners and why it is so important to have the right insurance. Finally, we talk about how you can structure your business in a way to protect your business assets. This is an essential episode for all business owners to ensure you are doing what you can to protect your valuable business investment.
Podcast Transcript Available Here
Duration: 27:33
Trudi Cowan: Welcome everyone to today's episode of the Financial FOFU podcast. Today Sarah and I are going to have a bit of a chat about some of the ways that you can protect your business and your business assets. Trudi Cowan: It's an important topic. Sarah Eifermann: Absolutely. And it's something that I think isn't often considered, like, why would you need to do it? A lot of people don't even do it in their personal lives. So it's not a natural process that they would then consider to do it, in their business life. Trudi Cowan: That's right but there are definitely a few different ways that we can use to protect new business assets. It is important because sometimes some of the assets in your business are really quite valuable. Sarah Eifermann: So what we're talking about today is after you've had like initial advice about setting up your business, though, right, it's not about the right entity because we have another podcast episode. You can go listen to it in Season 1. Trudi Cowan: It's more about how do we then once we're trading and we're happy or comfortable? How do we then protect the tools of trade and the assets that we use within our business to make sure that they're still there for the long term? So we're talking about things like your physical assets; your cars, your [inaudible 4:24] Sarah Eifermann: Your laptops, computers, phones, and you might have really cool cameras or Trudi Cowan: All of those sorts of things. So what are some of the ways that we can protect those assets? And one of the first ways we're going to talk about is a thing called the personal property securities register. PPSR Now, this is an Australian Government register. And it's an online database that shows whether someone is claiming a security interest in certain goods for assets. So once the register allows you to do is to go on and register your own assets and the claim that you have over them. So down the track, someone tries to illegally purchase those assets or claim them as their own. You're actually already registered on this list as being the rightful owner and having a rightful interest. Sarah Eifermann: Correct just to clarify, the PPSR is not a register of property ownership. It's a register of your security interest in that property. So, for example, to clarify for people, if you were borrowing money to buy a car a lender would claim a security interest in that car because you owe the lender money for the purposes of purchasing that car. A car is paid off, and the PPSR or personal property security register charge is removed. That lender has the right to have a security interest in that piece of property. Trudi Cowan: The two most common circumstances in which you might register on the PPSR is when you're selling goods, under an arrangement where you retain the title for a certain period of time. So it might be that you in as you say, in the case of financing, sometimes you don't actually get the title of the asset that you're buying until 12 months or 18 months into the period when you've paid a certain amount towards it. The second situation is where you're hiring, renting, or leasing out goods for more than two years. So you might be a company that leases out large pieces of equipment to other businesses on a long term and the long term arrangements, you could then register your interest in that asset. So because you don't have physical possession of that asset, this is just something that then allows you to make sure you still have your interest in that asset registered. Sarah Eifermann: And that's really important. For example, if you've got an excavator that goes and sits on a site for two years, and that business is using it, you might be using it as well on that site and claiming an invoice but that's not physically in your possession anymore so they could turn around and nine-tenths of the law. Trudi Cowan: That's exactly what I was thinking, nine-tenths of the law so this then allows you to have something that trumps over that position that you're registered, you've got this legal registration. Sarah Eifermann: Another time where I say a thing of value is if you have a group of companies, so you have a family trust and then you have a separate trading entity. And the family trust actually owns those goods for asset protection like you've had the advice, you've done the additional work about your structure and it is either leasing or loaning the equipment to a trading entity. The whole purpose of this is that it is possession isn't in the trading entity. It's not in the asset protection entity. So if there's no security registration on those goods for the trust, then if a Liquidator was to come along or if the trading entity was to be sued, there could be an argument that $200,000 Escovedo or $800,000 piece of equipment is really the trading entities because it has full use of that without a lease agreement or without loan terms and without PPSR registration. Therefore, we can take that as part of a settlement or requirement or a force demand. And that if there's debt on that asset in the asset protection entity, the debt will still stand, but you won't have the asset. Trudi Cowan: It's actually one of the most important reasons as to why you should register on PPSR, it can make the difference between you being a secured and unsecured creditor in the case that the business position of the asset. Yes, Liquidation. Sarah Eifermann: So can we talk about that quickly? I think especially with some of the building companies that are going lost at the moment. It's a really important point that a lot of people don't understand preferential payments, and how this sort of works, and how PPSR registration can assist in terms of that secured or unsecured creditor position. Trudi Cowan: So look, I don't know the exact order but there is an order of who gets money in the case of liquidation, and definitely, if you have a secured interest over an asset, then you're going to be much higher up that list than if you aren't a secured creditor. So, a secured creditor just means that you have a legal registered interest. So if you need a mortgage on a house, that's why the banks do it because it ranks first. Sarah Eifermann: First mortgage, priority on the list. So the priority comes it's usually determined at the time of the creation of the interest so in the case of a mortgage, first mortgage, second mortgage, and third mortgage so the first mortgage aid in this instance would have to agree to the second mortgage registering an interest, but with PPSR under the PPS Act, Division Three of part 2.6 outlines the rules around the priority of security interests, but it's pretty much the earlier you register, the higher up the pie chart you go in terms of getting access to what's rightfully yours in the event that something goes wrong. Trudi Cowan: It's not very expensive to register on the PPSR. Sarah Eifermann: I think a search is only $2. Registration is, maybe 15/16 bucks. Trudi Cowan: Yes, it's not much. It's definitely worth the very small cost to do that registration. And you bring up another point search, if you're buying a second-hand asset you can actually search the register to see if the asset you're buying is already secured to somebody other than you're dealing with. So it's actually really worthwhile transparency, that $2 dollars to go and do a check to make sure that the asset that you're buying, you're actually buying it off the proper person, the legal way. Sarah Eifermann: I think it's really important now more than ever with the second hand like car and equipment market being so booming as a result of COVID and our supply issues that you as a business maybe not looking at a new vehicle where you normally would have been because of the delays so you're looking at secondhand equipment, purchasing from private people, individuals or private businesses, do a PPSR search and make sure that it matches the person that it says. If there's a registration, and then there's likely to not be registration, and perhaps in this interest instance and that is a good thing because it means nobody else owns the asset. or has a security interest in that asset. No other bank is going to come and take the money and repossess the asset later. Trudi Cowan: So if you want to find out a little bit more about the PPSR register, the website ppsr.gov.au and of course, we'll drop that link into the notes and onto our website as well. Make it easy to navigate there. Sarah Eifermann: Quickly back to the preferential payments. Can we get an explanation for everyone listening? Because we kind of touched on it, we didn't really talk about it. So in the instances where a business goes bust but owes you money. When a liquidator comes into a company and goes through its books for liquidation or wind up or administration, whatever stage of the process they're taking. They will look back for the last six to 12 months and see which businesses have been paid out of those company funds. And there is a potential for what is called preferential payments where because there's no security, you're not a secured creditor. and secured credit is usually our treaty, the ATO, a lender. Trudi Cowan: The ATO ranks at high these days. Sarah Eifermann: As it changed? They normally get their piece of the pie pretty quickly. Shade notice and all. Trudi Cowan: They simply try. Sarah Eifermann: But if you're a secured creditor, effectively you rank up high the list so if you are trades that have been no tradespeople that have been paid from a builder, the builder goes bust, the argument from the administrators is as well they should never have paid you because they should have paid their secured creditors first, their lenders, the ATO or whoever else will secure it. And therefore you've been paid in what's called preferential payment terms and you need to refund the money that you've been paid for work that you have done to that company's account so that they can pay their secured creditors as priority because it's a priority registration. And that's a really important part of something that we all should know and do in business. Sarah Eifermann: Especially if you're in personal services, and you've got a large contract with somebody register on the PPSR as a secured creditor for that reason. Because if you don't and that business goes bust, you have to pay back what they've paid you for what you've done. It's not about the legitimacy of the work that you've done. It's solely about whether you're a secured creditor or an unsecured creditor in the eyes of the law. Trudi Cowan: We actually found that to be an issue for accountants because as accountants, we should know whether the business was trading and so on. So they would often come to us first for reimbursement of these. Sarah Eifermann: You shouldn't have been paid because you should have known better and you've got legal and ethical obligations, and therefore you have to pay us back. Trudi Cowan: Yes, I just double check. The ATO is an unsecured creditor these days. Sarah Eifermann: Interesting. That's so interesting, given everything that's going on with the way the ATO is chosen. So I find it really interesting, but again. Trudi Cowan: Moving on to our second way to protect your assets. It's really around having the right insurance for your business. You would be surprised how often I pick up the books of a new client and I know[crosstalk 14:42] you wouldn't, because I have the same problem I always scan the paying out and say don't you have insurance? Sarah Eifermann: Same. It's the first thing I look at. Why do you have like $500 insurance bill, when you're trading turn [inaudible 14:55] turnover is like 3 million dollars? Trudi Cowan: Depending on the type of business that you do. There are so many different types of insurance that you might need. We could be looking I just started listing down a few when I was preparing for today, public liability professional indemnity. Product liability insurance if you're building premises, of your cars, your equipment, cyber insurance. Sarah Eifermann: It's so funny because I literally just had this conversation with my sister yesterday we were talking about the costs of running a business and I was like Do you realize how high my insurance bill is to just trade. Go public liability. Two times professional indemnity, one for lending and one for business advice. I don't need that. I had product liability still on some old stock that I have from when I used to have an online store. If I ever gift or sell that stuff, I'm the manufacturer according to Australian law and I've got car insurance like computer insurance and cyber insurance. She's just looking at me like yes. Trudi Cowan: I got to mention WorkCover insurance. Sarah Eifermann: And WorkCover on top. I forget to mention that one. Trudi Cowan: Funny story about WorkCover insurance. During COVID. A lot of the state governments actually required that you had to be registered for work to get the grants, I had such an influx of people applying that should have already had WorkCover. The insurance company just had to blow out their application processing times because there were just so many people who fined that should have already had WorkCover insurance. Trudi Cowan: Whilst we're on it, we should really talk about it. A lot of people think that if you're in a company, and you're a director of the company, you don't need WorkCover insurance, and you don't need it as a sole trader. But if you're employing anybody, yourself included. If you pay yourself on wages, which I do, I have WorkCover. It's really important to realize that you need to have WorkCover, that type of insurance. Sarah Eifermann: Like that's statutory insurance. Trudi Cowan: It's statutory required and something that people often don't realize is that if you are a company, your company has directors, and therefore you have employees, whether you pay them a wage or not, you have employees. So if you're running a business out of that company, then you need to have WorkCover. Sarah Eifermann: So, by definition, a director is legally an employee, if you're in the company and just taking drawings, and you're not putting yourself through as PAYG, you're still in breach if you haven't got Work Coverage insurance. Trudi Cowan: And the other thing to factor in as well, is that depending on the type of contractors that you use, they might also be considered employees under the WorkCover definitions. So even if you go well, I don't have any employees but I have contractors, you may still be required to register for WorkCover insurance. So really important to check that every state has really good websites that explain the rules and how it all works. It is definitely worth jumping on if you don't already have WorkCover insurance, just checking whether you should have it. But as we said, there are lots of these other different types of insurance. And the reason that they are so important is because if something goes wrong, that's what going to protect your business, your assets or potentially your livelihood. Sarah Eifermann: Absolutely, Trudi Cowan: I'm an advocate for insurance. Nobody likes it. Trust me, I don't like paying for it. But when running a business, it's one of those necessary things. Sarah Eifermann: And what I can tell you is that there is a thing called Insurance Premium Funding and it's much cheaper than what's offered by the insurance company on monthly installments and they usually at 12% Those repayments we can do it at around four and a half, five, 6%. Where we can bundle up, we get the renewal date for your insurance done on the same day, say the first of July, for example. And that might mean for a period of time some of your insurances or on nine-month terms instead of 12-month term so that we can get all the renewal dates at the same day. And then what we do is we bundle that cost of that insurance say at 10 grand, we bundle that insurance into an insurance premium funding loan and you make 11 10 payments on that $10,000. So you might pay, you know what is that $10,000. Ten payments would be 1000 plus the insurance. Sarah Eifermann: Well, I was gonna say though, to be fair, you've got to include the interest rate so it wouldn't really be the fee of setting up the facility. So for example. Trudi Cowan: Over $1000. Sarah Eifermann: It might be $1,000 a month rather than sorry, higher than $1,000 a month other than a flat $1,000 a month because you got the additional costs but you would pay $1,000 a month and rather than $10,000 upfront, or $2,000 one quarter $5,000 the next quarter because we know cash flow right and it impacts your cash flow. And if we can set your insurances to be a set payment set and forget and you know, every year that it's roughly going to be this large amount, it can at least help with the cash flow and therefore my actual point is not an excuse to not have the right insurances because your argument is that you can't afford the premium because of the lump sum payments required. Trudi Cowan: Really my view is if you can't afford the premiums then you shouldn't be in business. Now look, we're not insurance experts if you need some help with your insurance head to an insurance broker. Sarah Eifermann: I have a good one I can recommend. Feel free to DM me. Trudi Cowan: There are absolutely worth their weight in gold. Just to make sure that you do have the right policies in place that have the right levels of cover and they're covering the right things. And business insurance brokers can do everything for you so they can do it from your public liability. They can do with them. Some of them will help with your WorkCover as well. They'll do everything for you. So if you either don't have insurance or don't think you have the right colors, get on to a broker. They'll get everything done. Definitely worth the money to pay one. Sarah Eifermann: Absolutely. Trudi Cowan: Now, the third thing we'll have a chat about today to help protect your business is the right structure. I'm not talking about the right structure. from which you trade your business but the right structure in that you hold and own your business assets. So, we often talk about the structure in the context in the context of protecting your personal assets. You can structure your business in such a way also to protect your business assets. And this is particularly so if you have large and expensive business assets. Think, if you have a warehouse. If you had a warehouse and you came to me for advice we would not be looking at putting that warehouse in the same entity as which you trade your business out. Sarah Eifermann: I'm going to get in here, a little bit because I often have clients come and say, Sarah, I want to buy a factory for my business to trade in and I go yes, sweet. What entity you're buying it in and they go, the company that I trade-in and I go, you putting an eight and $9 million dollar asset into your trading entity and they go, I didn't know that I shouldn't. Trudi Cowan: The reason why you shouldn't is if somebody sued you. That means that the warehouse is up for grabs. Yes, it is. Right if you put that warehouse in a separate company or a separate trust they're no longer suing the entity that actually has the building in it. They are suing the trading entity. Trudi Cowan: Putting some separation between those two entities is going to help protect that building in the event. Hopefully, unlikely event but in the event that you are sued or something does happen, that is causing a problem. So if you're buying large assets, whether they're warehouse, if you've got really large equipment, you know, I've seen structures where all the really large equipment is bought in entity and then it's lease, bought, trade or used within another. Trudi Cowan: The reason that people do that is just for that separation perspective and just to provide a bit of protection if the worst was to happen, Sarah Eifermann: Absolutely. 100% agree with that. So if you have a trust that's sitting there not doing anything, and you're trying to buy equipment in your trading entity, and I'm not maybe not talking just about, you know, a $50,000 car like a year. We're really talking about the $200,000 estimator or the $100,000 truck or the $800,000 factory or once you sort of I think go over like the 50k component you should be buying it in the trust and leasing it back to your trading entity for asset protection benefits that may not work potentially within the grounds of your business. Maybe that doesn't work. Maybe your lending positions don't work either. In that case, get better advice. and plan ahead because planning this stuff out allows these things to happen and they are so important. Trudi Cowan: And the thing is as well that you might think well it's only a $100,000 truck but think about how many 100,000 trucks you actually have in your business that you've got multiple of them, quickly adds up in value. Sarah Eifermann: You took the words out of my mouth because it might just be a $50,000 car but if you've got 10 of them. That's half a million dollars of value or assets in the pool that is up for grabs after the secured creditor, which is the lender. Trudi Cowan: I've seen I think was a house builder. And they would buy the blocks of land but they would buy them in one entity and then build the houses in another entity. And again, it's keeping those really large assets separated from the entity that's doing the trading so they would sell them from that block from that they would do the actual building of a house from the separate entity and that was the way of protecting. Sarah Eifermann: That was technically both trading but they were able to maintain the asset protection by doing it because the liability that comes with being a building company is very different to the liability that comes from being a real estate company or a Property Development company. Trudi Cowan: Exactly, which brings to another point that I do often have clients come to me and say husband does run this business, wife runs this business, and we've gotten them both in the same entity. Not always a great idea because if the husband's business gets sued wife might also lose hers. If you have them in separate entities, the husband's business might get sued, but why she's perfectly safe and protected in a separate entity. Sarah Eifermann: Here's the argument, but it's going to cost us more. It's going to cost double the space to set up and it's going to cost us, exactly. right? [inaudible 25:25] So like the reality is yes, it will cost you more but it will cost you a lot less if the event does happen, which is why you paid insurance policy. Trudi Cowan: So it's about protecting and doing those preventative measures upfront. So that down the track should the worst happen. You're already set up perfectly to try and protect as much as you can. Sarah Eifermann: Yes, completely. I get excited because it's kind of foundational again like you know, basics of running a business and Trudi Cowan: It's really very important. So look, if any of those three things sort of ringing in your ears and go I really need to look at that. Go back, listen again. Take some tips and then go away and do something about it. Put it on the priority list to get your business protected, right. Sarah Eifermann: Yes. Absolutely. Next week, we're going to talk about probably what's the fourth part of this bar we've deliberately separated into a different episode is getting the right advice and where do you get the Sarah Eifermann: I've talked about what is an advisor before and what different types of advice there are, but I suppose this is something that you and I come up with a lot is that people are always asking us for quality referrals to advisors because they can't find them. So where do you go to get the right advice? Trudi Cowan: And also why it's important to actually get advice rather than waiting. Sarah Eifermann: Yes, nothing better than the backyard barbecue advice that often comes around, actually from the Pub. Pub. Barbecue out tonight. Depends where you live. Pub advice is I think on a very different level from barbecue advice. Just quietly, not a professional about Trudi Cowan: Tune in next week because we are actually going to give you some examples of clients we have seen that have done things really well and some that maybe could have done things better if they'd gotten the right advice before they proceeded. So until next week. Thanks for listening. Sarah Eifermann: See you then.———————-
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