In the wake of the 2023-2024 Federal Budget in May, Equifax’s Quarterly Commercial Insights for the first quarter of 2023 revealed declining business credit demand and an emerging insolvency ‘tsunami’ that threatens the outlook for the Australian economy.
We are seeing more businesses ‘shopping around’ for better credit deals. This surge is in line with RBA’s cash-rate hikes, suggesting that businesses are feeling the pinch and refinancing or seeking new lines of credit at the lowest possible rate might help them weather economic challenges.
This behaviour, along with muted business demand, growing arrears, and rising insolvency, raise concerns that small businesses will face increased headwinds in the coming months.
Early warning signs
As insolvencies rise, small businesses need to be conscious of the financial health of their professional ecosystems. SMEs need to manage their risk to protect their business during turbulent times.
The good news is, there are tell-tale signs SMEs can look out for to identify businesses that are struggling:
- Late payment trends. Equifax data shows that late payments are on the rise. Consider your customers and partners, and identify how well these businesses are paying their suppliers. Are payments typically late? By how long? This is often an early warning sign of financial distress.
- Staff cuts. Are the businesses you are working with hiring new employees or making cuts? Staff cuts are often an indicator of financial stress. If a business is laying off staff, you may need to reconsider payment terms.
- High-risk industries. Some industries are more exposed to late payments and dependence on supply chains. The construction sector, for example, has been under pressure for some time with supply chain issues contributing to higher project costs and timeframe blowouts. As a result, the construction industry experienced a 91 per cent increase in insolvencies in Q1 and was in the top two industries for shopping around behaviour. Small businesses working with high-risk industries should take steps to manage their exposure.
- Commercial credit report and score. Checking a company’s credit report can help you better understand the risk they present and get the full picture early on. If a customer or supplier’s credit score is low, this is an indication that they are at risk of failure. Having access to this information allows you to take action early to reduce the impact on your business.
Taking action to future-proof your business
Despite the pressures, there are bright spots for SMEs. The Federal Government reaffirmed its commitment to supporting SMEs in the recent Budget, introducing multiple support programs including energy price relief, instant asset write-off, and a cashflow boost that will benefit 2.1 million small businesses as they face the economic headwinds. Additionally, businesses that invest in energy-efficient technology will be eligible for bonus tax deductions up to $20,000. Businesses that take advantage of these programs and invest in technology will be in a better position to enhance productivity and drive future growth.
Small-business owners can also take immediate steps to help safeguard their businesses in the short term. Requesting deposits or payment on delivery, and tightening your payment terms, e.g. from 30 days to seven days, can help manage cashflow.
You can also tailor your collections policies, managing late payers more tightly while taking a different approach with reliable payers. Understanding each customer’s risk profile is a valuable tool when tailoring collections, obtaining a credit report with trade payment information enables you to make an assessment of the likelihood of non-payment and use this information to adjust your terms accordingly on a case-by-case basis.
Being armed with the best knowledge, data and analytics is essential for small businesses that want to make critical decisions with greater confidence, so you can avoid the insolvency ‘tsunami’ and keep moving forward.
