SMEs braced for further insolvencies with defaults still rising

New data from digital credit reporting agency CreditorWatch reveals a worsening Australian economy, with SME insolvencies up 20 per cent in Q3 from Q2, an increase of five per cent year-on-year.

The Q3 Small Business Risk Report, which draws on data from 26 sources including ASIC, ABR, AFSA, courts and debt collectors, also shows the economy is likely to slow further with court actions brought by creditors when debtors default increasing by 21 per cent over the last three months, and 8.8 percent year-on-year. Payment defaults registered on CreditorWatch’s platform also rose 13 per cent year-on-year. Both suggest further SME insolvencies are likely.

Patrick Coghlan, CEO of CreditorWatch, said, “An increase in court actions should be viewed as a canary in a coal mine for the Australian economy since SME insolvencies are likely to increase on top of the growth we saw in Q3. Small businesses are the backbone of the Australian economy, so further payment defaults mean trouble for millions of working people and without the certainty of being paid by debtors, companies are unable to make investments in new people, equipment or facilities to fuel their growth.”

States support national picture

The Small Business Risk Report’s state-specific data supports the national picture overall:

  • New South Wales: Court actions increased 63 per cent over the last quarter
  • Queensland: Court actions increased 25 per cent over the last quarter
  • Western Australia: Court actions increased 21 per cent over the last quarter
  • Victoria: Court actions showed a marginal decrease – down two per cent over the last quarter. However, the decrease comes after four consecutive quarters of growth including a record number of court actions recorded in Q2 2019.

Industries most at risk

In Q3 2019, the construction sector; companies within professional, scientific and technical services; retail; manufacturing and wholesale trade showed the highest number of court actions. However, with average days to payment across all industries now sitting at 57 days, SMEs everywhere are struggling to meet payment deadlines. In particular, the Small Business Risk Report reveals increasing risk in the following industries:

  • Information Media and telecommunication increased from 8 days to 44 days, a 450 per cent increase.
  • Mining increased from 12 days to 34 days, a 183 per cent increase.
  • Accommodation and food service increased from 52 days to 74 days, a 42 per cent increase.
  • Education and training increased from 19 days to 29 days, a 53 per cent increase.

Summing up the report’s findings, Coghlan said, “All the signs suggest we should be preparing for further economic slowdown. With companies looking to lengthen their payment terms, at the same time pushing debtors to pay faster, businesses should be taking this time to review their due diligence processes, check their terms and cashflow, and invest in the necessary technology and advice. One default can have a big impact on a small business and so it’s crucial that Australian SMEs take advantage of all avenues of preventative analysis available to them.”

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