SMEs approaching their four-year anniversary* are entering the highest risk period for business failure and should take extra steps to protect their business from financial stress, according to newly released data from Equifax, information solutions company and provider of credit information and analysis in Australia and New Zealand.
According to the data** 55 per cent of Australian SMEs – businesses with fewer than 50 employees and an annual turnover of less than $10 million – were credit active in 2017, 24 per cent of which were categorised as being high commercial risk.
Justin Eley, Senior Product Manager, Commercial Risk at Equifax, said that many SMEs moved into a growth phase at the four-year mark, which could explain the spike in adverse credit events around this time.
“When a business increases its volume and type of credit enquiries, its risk of default or other adverse events rises in parallel. For SMEs, a spike in credit enquiries is an expected result of deciding to grow a business that has been established and proven its financial viability for a reasonable stretch of time – frequently after around four years.
“Pushing for growth or expansion in any business is a calculated risk, a large part of which is financial. With this in mind, the spike in failure events (external administrations) for SMEs from their fourth year through to their sixth year can be viewed as part of the business lifecycle and should be a factor in any credit decision,” Eley said.
“However, with more than 300,000 new businesses entering the market each year***, the three-year spike in external administration events still only represents approximately 0.5 per cent of all SME entities, and therefore is not on its own a reason for credit to be refused,” he added.
Approximately 36 per cent of Australian SMEs have high to very high demand for finance, with around 46 per cent falling in the medium to very high commercial risk categories. Within this, the construction (33 per cent) and retail trade (31 per cent) had the largest volume of high and very high risk commercial entities, followed by manufacturing (30 per cent).
“While the construction and manufacturing sectors feature prominently in the riskiest industries, our data also suggests that the retail sector is currently a high-risk industry. As retailers face increased pressure from global brands and online market entrants, the risk factor of this sector is also likely to grow,” Eley said.
Geographically, New South Wales, Victoria and Queensland house almost 84 per cent of credit active SMEs and, as such, are also home to the largest proportion of high-risk entities. Of the three major states, Victoria was home to the smallest proportion of risky entities in 2017.
Eley said that many SMEs are so focused on the day-to-day running of their business and ensuring regular cashflow that they don’t stop to consider their overall credit profile or the impact this could have on them down the line.
“Understanding and managing credit risk is key for both lenders and applicants. A well-managed business credit profile can help enable a SME owner to successfully apply for the additional funding they need to expand or support their business, while a SME that looks like a credit risk is less likely to get the finance or terms they want,” Eley concluded.
