Too often businesses worry about the cost of registering on the PPSR while ignoring the cost of not registering. Some decide that the best way to control their costs is to register only their more significant customers – those with a high credit limit or actual exposure. It’s true you’ll pay less in registration fees by not registering all your customers, but it’s a false economy. Here we’ll show you why.

The benefits of registering all your customers on the Personal Properties Security Register (PPSR) far outweighs the costs.

The government’s charge for registering on the PPSR is less than $10 per registration, not a high price to pay for protecting your business. However, we understand that this cost quickly multiplies when you have thousands of customers to register. You may even have to register and pay for multiple secured interests against each customer.

Faced with the expense of registering large numbers of customers, you might be tempted not to register some customers. After all, if you’re dealing with a small customer with a low credit limit, surely they couldn’t do you much harm? Wrong. 

Here we look at five scenarios that could happen to your business if you choose not to register your security interest against any customer with a low credit limit – let’s say less than $30,000.  

1. Overtrading

   A customer with a $25,000 credit limit manages to get $75,000 of goods before being placed on stop credit by you. Six weeks later the company goes into administration. This is known as overtrading, and is a primary cause of insolvency.

   It’s no use trying to register on the PPSR when you start to get worried about the account. If your customer is using your goods as inventory before you register them, you lose the super-priority of your Purchase Money Security Interest (PMSI). A valid PMSI registration which had super-priority means you go straight to the top of the creditor list whenever you need to recover your property or its value from insolvency practitioners.

   Even if your customer is not using your goods as inventory, you would still only get the PMSI priority for goods you have delivered during the 15 business days prior to registration on the PPSR. See Personal Property Securities Act, Sect 62.

2. The 6-month rule

   You’ve decided not to bother registering this smaller customer on the PPSR. But after a while, you become concerned about their financials, so you register them. You may find it’s too late.

   Not everyone realises that the Corporations Act was changed to accommodate the Personal Properties Security Act (PPSA). The idea is to prevent companies with knowledge of imminent insolvency fraudulently granting security to related or preferred parties, but the rule can also catch the innocent. Here are the abridged details:

   If

   1. you register your security interest more than 20 business days after the security agreement is created and
   2. your customer becomes insolvent within 6 months of registration

   then your security interest will vest in the insolvent company.

   See Division 2A of chapter five of the Corporations Act.

   In plain English, you will lose your goods!

3. The hidden cost of monitoring

   Who in your organisation is going to track whether a customer goes over the $30,000 credit limit you have set, and thus needs registering on the PPSR?

   Your business processes will need to be redesigned to tightly monitor your sales team if you are to ensure your unregistered customers don’t go over their limit. There may be a direct cost of lost sales, and there are undoubtedly the hidden staff costs of monitoring these credit limits.

4. Unfair preferences

   Your small business customer is slow to pay, so your credit manager works hard to collect lump sums on the account.  

   The customer goes out of business, and the liquidator comes knocking to claw some of that money back under the Unfair Preference regime in the Corporations Act. If the claim is for $30,000 or less, it’s probably not worth fighting in court. See Corporations Act Section 588FA(1).

   The outcome could be entirely different if you had adequately registered your security interests. The PPSR gives you a powerful line of defence.

5. The shoot-throughs

   If you have a ‘long tail’ of low-value debtors, you’ll be aware of businesses which sell their assets and disappear without settling their debts. Even if the location of the proprietor is known, it’s often not economical to chase them.

   It is here that PPS registration can sometimes provide unexpected benefits, giving you a seat at the negotiating table. The PPSR allows purchasers and their solicitors to conduct searches when a business is sold to see if the business assets are encumbered.

   If your interest is disclosed, the vendor has no choice but to approach you with a discharge request – which you will gladly provide on full settlement of your account.

   We offer practical tools, solutions and advice to help you accurately and efficiently deal with PPS registrations. Contact our expert PPSR consultants to find out more.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.