The COVID-19 pandemic has created significant financial challenges for small and medium enterprises (SMEs) across Australia. Many businesses have experienced reduced revenue, disrupted supply chains, and increased operational costs. If your business carries debt, these pressures can quickly escalate into serious financial difficulties. That’s why SME owners impacted by coronavirus urged to contact creditors proactively. Early communication can help you secure relief, restructure debt, and protect your business.
This blog provides a comprehensive guide for Australian SMEs, including practical examples, calculations, and step-by-step advice for negotiating with creditors effectively.
Why SMEs Should Contact Creditors Early
Prevent Escalation of Debt
When businesses miss payments, creditors may add penalties, charge higher interest rates, or begin legal action. By contacting creditors early, SMEs can demonstrate good faith, potentially preventing escalation and protecting their credit profile.
Access Government and Banking Relief
During the pandemic, many Australian financial institutions, backed by the federal government, offered temporary relief programs. These include payment deferrals, interest waivers, and loan term extensions. The Australian Taxation Office (ATO) also introduced options to defer tax payments, and the SME Loan Guarantee Scheme allowed banks to offer easier refinancing options. However, these programs often require the borrower to reach out proactively.
Preserve Business Relationships and Reputation
Maintaining transparency with creditors preserves trust. A proactive approach helps keep relationships with banks, suppliers, and investors positive. A damaged credit history can have long-term consequences, including difficulty securing future financing.
What SMEs Need Before Contacting Creditors
Preparation is key to negotiating effectively. SMEs should gather:
- Financial statements: Profit & loss, cash flow, and balance sheet reports.
- Cash flow forecast: Project your expected income and expenses for the next 6–12 months.
- Debt schedule: List all debts, interest rates, repayment dates, and outstanding amounts.
- Proposed relief request: Clearly outline what you are seeking (e.g., deferral, interest waiver, term extension).
- Supporting documentation: Justify your request with future revenue projections, government support programs, or operational challenges.
3. Cash Flow Example
Suppose an SME in Melbourne had monthly sales of $100,000 pre-COVID with a 30% net margin. During the pandemic, sales dropped 50% for 6 months, then recovered to 80% of original levels. Fixed costs (rent, salaries, utilities) are $20,000 monthly, and debt servicing is $10,000 monthly.
| Month | Revenue | Net Profit (30%) | Fixed Costs | Debt Service | Surplus/Deficit |
| Pre-COVID | $100,000 | $30,000 | $20,000 | $10,000 | $0 |
| COVID Shock | $50,000 | $15,000 | $20,000 | $10,000 | –$15,000 |
| Partial Recovery | $80,000 | $24,000 | $20,000 | $10,000 | –$6,000 |
| Full Recovery | $100,000 | $30,000 | $20,000 | $10,000 | $0 |
This shows that without relief, the business faces negative cash flow during recovery months. Using this data, SMEs can propose realistic repayment solutions to creditors.
How to Approach Creditors
Prioritize Which Creditors to Contact
- Banks and secured lenders: They hold collateral and legal power.
- High-interest loans: Reducing these first can relieve cash flow pressure.
- Critical suppliers: Keeping supply chains intact is vital for recovery.
Communication Style
- Write a formal, respectful letter or email.
- Be transparent about your financial position.
- Provide forecasts, supporting documents, and a clear request.
- Invite dialogue and be open to counter-proposals.
Possible Relief Options
- Payment deferral or moratorium: Pause principal and/or interest payments temporarily.
- Interest-only payments: Pay only interest for a period.
- Extension of loan tenure: Reduce monthly repayment amounts by extending the term.
- Interest rate reduction: Lower rates for a fixed period.
- Refinancing: Replace existing loans with new, lower-cost loans.
- Partial debt write-off: In extreme cases, negotiate forgiveness of part of the loan.
Worked Loan Example for an Australian SME
An SME in Sydney owes $500,000 on a 5-year loan at 8% annual interest. Original annual payment is calculated as:
Payment = r * P / [1 – (1 + r)^–n]
Where r = 0.08, P = 500,000, n = 5
Payment = 40,000 / [1 – (1.08)^–5]
= 40,000 / 0.3194 ≈ $125,230 per year
If the business proposes a 2-year moratorium, the loan balance accrues interest:
New balance = 500,000 × (1.08)^2 ≈ $583,200
Repaid over 5 years post-moratorium:
New annual payment = 583,200 × 0.08 / [1 – (1.08)^–5] ≈ $145,990 per year
This clearly shows creditors the repayment plan is feasible post-moratorium.
Legal and Accounting Considerations
- Interest accrual: Some relief programs defer payments but interest continues to accrue.
- Tax implications: Debt forgiveness may be treated as taxable income.
- Financial reporting: Debt restructuring can affect balance sheets and financial ratios.
- Compliance: Ensure any agreement is formally documented to avoid future disputes.
Australian Government and Regulatory Support
- Australian Taxation Office (ATO): Offers payment deferrals for BAS, income tax, and GST.
- Australian Banking Association (ABA): Encourages banks to provide temporary relief.
- SME Loan Guarantee Scheme: Helps SMEs refinance existing loans under government-backed guarantees.
- National Debt Helpline: Offers free advice on negotiating with creditors.
These resources provide both financial and advisory support to SMEs struggling with COVID-related debts.
Step-by-Step Guide to Negotiating With Creditors
Step 1: Identify financial stress early.
Step 2: Prioritize debts and creditors.
Step 3: Prepare financial statements, forecasts, and a proposal.
Step 4: Contact creditors formally with a clear and respectful request.
Step 5: Negotiate terms (moratorium, interest relief, term extension).
Step 6: Document the agreement in writing.
Step 7: Monitor repayments and update forecasts.
Step 8: Explore alternative options if negotiations fail (refinancing, government schemes, or insolvency advice).
Also Read: How Small Businesses Save Money: A Complete Guide
Final Thoughts
The COVID-19 pandemic has tested the resilience of Australian SMEs. Debt pressure can be managed effectively if owners act early, communicate transparently, and use available relief programs. By preparing forecasts, negotiating in good faith, and documenting agreements, SMEs can protect their business, preserve credit ratings, and position themselves for post-pandemic growth.
Remember, proactivity is key. Contacting creditors early is not a sign of weakness—it is a smart, responsible step to protect your business, your employees, and your future.
