Borrowing Risks Related To Government Debt

“The Ability To Borrower Money Is Directly Related To Government Debt In Arrears”

When a business starts to have cash flow issues, one of the first things that start to fall behind is government remittances for income tax, payroll deductions, and sales taxes.

The argument from the business owner is that there is no money available to pay these bills and still cover off wages and essential operating costs, so the government will have to wait.

And while this may very well be the case, the long term survival of the business is going to depend on having this be a short term scenario.

If it can’t be made short term, then a growing or consistent level of government arrears is likely going to start a death spiral for the business.

This is largely because you start the process of death by a thousand cuts.

Lets discuss further what can potentially transpire.

First, your existing primary business lenders will typically have a covenant that you are up to date with your government remittances. If you fall behind, at best they will charge you a higher interest rate until the remittances are brought up to date. At worst, they will demand repayment and kill your cash flow if you are utilizing any type of bank or institutional operating facility.

Second, if you want to try and restructure your existing debt, even if you have the cash flow and equity to attract more business financing capital, no lender is likely going to advance any new funds to you unless the government arrears are brought up to date. If there isn’t enough incremental capital available to do this, then restructuring will not be possible. Even if there is a way to restructure to get everything in order, it will likely involve moving to another lender, potentially a higher cost lender that works with company’s in a certain amount of financial distress, where the costs of transfer to the lender can be considerable, further putting you behind the eight ball.

Third, at some point the government will take action against you. Many times you can negotiate a repayment plan to catch things up, but if this goes sideways, then in many jurisdictions the government agency you owe the money to will step in and seize your bank account, register garnishee orders with your customers, and put you in cash flow management hell.

If you can keep the government stuff paid up to date, you improve your chances to maintain existing credit and improve your chances to secure incremental debt or equity financing.

When you’re behind with these accounts, your options are limited and in most cases non existent.

Having a plan to stay out of government arrears, or putting a plan in place to pay them up as quickly as possible is going to be important to long term survival of the business.

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About the Author Brent Finlay