SME sectors at highest risk of default revealed

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Research conducted by credit reporting bureau CreditorWatch reveals the top three industries with the highest probability of default – the likelihood that a borrower won’t be able to pay back the debt they owe and a key indicator that a business is in financial distress.

Accommodation and food services are the most at-risk industry, with 6.9 per cent of its businesses at risk of failing to pay back the debt they owe. Two other sectors – arts & recreation industry and education & training – share second spot, both seeing at 4.7 per cent of their businesses at risk of being unable to pay back what they owe.

“It’s unsurprising that frontline private sector industries would make up the top two,” CreditorWatch CEO, Patrick Coghlan, said. “Areas where a combination of skilled labour shortages, supply disruptions, uncertainty around COVID opening rules, and a lack of consumer demand through COVID fears were always going to be prominent casualties.

“Our latest CreditorWatch data suggests many of Australia’s businesses are living in an artificial trading environment again and we’re at risk of seeing a resurgence of zombie businesses,” Coghlan added. “Companies are being protected by a relative degree of leniency still being afforded to them by financial institutions and creditors. How that dynamic plays out in 2022 will tell us a great deal about the true shape of Australia’s economic recovery against the backdrop of the uncertainty everybody faces.”

Coghlan said that businesses are going under the radar to cling on for as long as possible as Omicron seriously undermines trade activity and business confidence.

“One way businesses achieve this is by racking up large bills with the ATO and delaying payment for as long as possible, essentially using the ATO as a bank,” Coghlan explained. “When the ATO eventually shuts them down, this causes a domino effect, adversely impacting all the other creditors out there who believed the business was trading fine.”

Despite the bounce back in the economy in the December 2021 quarter, Coghlan warned that industries that rely on consumers taking part in social activities, such as wholesale trade and hospitality, continue to be burnt by ‘shadow COVID’ – a phenomenon that results in large numbers of members of the public going into voluntary isolation.

“With such high vaccination rates we will push through, but many SMEs are being hit hard,” Coghlan said. “We need to find the right balance between a COVID-normal living, free from heavy lockdown restrictions, that also keeps the virus at bay. Until we’ve hit that sweet spot, businesses will continue to struggle.”