Rising SME insolvencies a cause for concern

A new report suggests that SME insolvencies are likely to increase in 2020.

This finding comes from the recently-released CreditorWatch 2019 Small Business Risk Review that drew on annual and quarterly data from dozens of sources including ASIC, ABR, AFSA, courts and debt collectors

This marks a reversal from the decreasing trend that was seen from 2018 to 2019. While 14 per cent fewer SMEs became insolvent in 2019 compared to 2018, there was a 30 per cent increase in payment defaults year-on-year, suggesting tough times ahead.

The report also showed a year-on-year (YoY) increase in defaults across most industries from 2018-2019, including Transport (64 per cent), Healthcare (79 per cent) and Real Estate Services (61 per cent), indicating many SMEs are struggling to pay creditors. These defaults had a knock-on effect, as court actions jumped nine per cent nationally from 2018 to 2019.

Patrick Coghlan, CEO of CreditorWatch, said, “There’s a clear path that most businesses follow to administration. The first red flag is the registration of payment defaults before businesses find themselves embroiled in court action. Finally, burdened with the costs and unable to meet their financial requirements, they become insolvent. For those paying close attention, the registration of payment defaults against a business should send alarm bells ringing. In fact, CreditorWatch statistics show that 50 per cent of companies that incur a payment default go into administration within 18 months.”

The number of court actions registered against small businesses increased YoY in all states, except Tasmania.

  • South Australia: court actions increased 57 per cent from 2018-2019
  • New South Wales: court actions increased 39 per cent from 2018-2019
  • Western Australia: court actions increased 33 per cent from 2018-2019
  • Victoria: court actions increased 4 per cent from 2018-2019
  • Tasmania: court actions decreased 35 per cent from 2018-2019.

Despite a strong start to the year, a number of industries continue to be slow paying:

  • Construction: 64 days in Q4 2019
  • IT, Media and Telco: 62 days in Q4 2019
  • Financial Services: 63 days in Q4 2019
  • Rental, Hiring and Real Estate: 66 days in Q4 2019
  • Admin and Support Services: 90 days in Q4 2019

“While a decrease in business insolvencies from 2018-2019 suggests a strengthened Australian economy, a deeper dive into the figures suggests that storm clouds may be gathering,” Coghlan said.

“Year-on-year increases in defaults and court actions, including big jumps from Q3 and Q4 2018 to 2019, indicate SMEs are struggling to make ends meet. We’re likely therefore to see an increase in company failures over the next 12 months.

“Within complex supply networks, one payment default can have a disproportionate effect, ultimately leading to failed businesses and lost livelihoods,” Coghlan added. “Business owners should help secure their futures – as well as those of their workforce – by communicating with debtors and creditors and adopting technology to help them spot possible bumps in the road ahead.”

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