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As the major banks rein in their lending patterns because of the fallout from the Royal Commission inquiry, many small and medium enterprises (SMEs) have been looking for alternative ways to keep their businesses running.

While there are plenty of new options available, regulators have not vetted them all in the same way, and now insolvency companies are warning that there could be more than meets the eye.

According to one company, Jirsch Sutherland, alternative financing is not just an issue that could cause SMEs to default more easily if they choose unfamiliar terms. They also have the potential of breaking the law by doing so.

This comes as Australian Labor and Liberal members fight for control of parliament later this year. Labor’s negative gearing proposals are gathering momentum as the party receives backing from some of the big players in the consulting industry. When coupled with the dropping real estate market, there is a bit of a perfect storm that could easily catch businesses out.

The main reason for this is the relatively recent introduction of new Safe Harbor regulations, which allow a company’s director to trade on its behalf despite it going insolvent if the company operates within the predefined rules. Namely, this means that the director in question can only operate to the degree of finding a credit source or safe outcome for the company.

Jirsch Sutherland Partner Ginette Muller said that a recession may well be on the way, and considering current property market trends, there is little reason to believe that this will not affect lending policies.

Detailing how the property climate is currently ‘weighing heavily on anyone who either owns or aspires to own real estate,’ Muller believes that small businesses are the most under threat.

Part of the reason for this is because in such cases, ‘access to finance is usually conditional on the bank securing the loan against the director’s house,’ Muller said. She went on to suggest that directors would have to take more difficult decisions due to a potential incoming credit squeeze.

This could include company directors cutting back the number of staff, selling off assets or trying to alter repayment arrangements. Muller said that all of these could come down to the same issue – insolvency. She said that ‘Australia has some of the most draconian insolvent trading laws in the world’ and added that directors could ‘be about to commit an offence’ if any of these actions take place.

While current market conditions are not looking favorable, rockier territory seems to be ahead for SMEs trying to secure appropriate financing for the year ahead. If they seek it out regardless of the cost, then they could well find themselves in the dock, much like the banks that dominated last year’s news headlines.

Unless solutions to help keep small businesses afloat occur, the issue is likely to have a huge knock-on effect on the Australian economy in general, and a further slump would likely follow. Following Safe Harbor regulations is key for those in control of SMEs who want to make sure that they are adhering to the law properly.