SME sector plans for growth and increased debt

debt, financial recovery

There is a growing dichotomy in Australia’s SME sector according, to a new report.

The latest Canary in the Coal Mine report from Prushka Fast Debt Recovery revealed that while SMEs are positive about the future of their business and continue to plan for growth, they are also preparing for unpaid debts to be one of their biggest business challenges in the next 12 months.

Prushka’s bi-annual survey found 55 per cent of SMEs are planning for growth, and two-thirds are confident about the current position of their business. However, 53 per cent of respondents also list unpaid debts or cashflow as the issues they are most concerned about in the next 12 months.

Roger Mendelson, CEO of Prushka explained that it’s encouraging to see the SME sector continuing to plan for growth, despite the somewhat unstable economic and political environment. He said, “SMEs are the lifeblood of our economy, and even with all the noise about softening economic conditions we can see SMEs have a clear plan for ongoing growth.”

The report provided an early warning sign of potential economic conditions with the construction industry labelled, for the second consecutive survey, the industry which takes the longest to pay invoices.

“It’s concerning that more than one in five SMEs label the construction industry as the industry that takes the longest to pay invoices. Construction is such a vital part of the Australian economy, it’s an investment-led sector and bad debt or tough conditions in the sector can have a ripple effect throughout the economy,” Mendelson said.

The report also revealed over 45 per cent of respondents prepare for cashflow issues with a cash buffer in place for hard times, compared to 18 per cent who rely on a bank overdraft. The number of businesses taking out short-term loans to protect them against debt and poor economic conditions remains low; however, this number has increased 73 per cent in the past 12 months.

“There is some concern around the rise in SMEs using short-term loans to cover cashflow issues. At the moment we’re still talking about a small base, but it’s a trend to keep a particularly close eye on because in an environment with tightening credit conditions such loans are likely to be from non-bank lenders, which often come with higher interest rates. Such behaviour increases financial risks for SMEs and could lead to more pressure on cashflow,” Mendelson said.

The report also revealed that only 14.4 per cent of respondents refer debts to a collection agency in less than 60 days. However, those referring debts within 60-90 days have increased from 16 per cent to 24 per cent in the past year.

SMEs debt levels have generally remained at constant levels for a 12-month period, with 53 per cent of respondents stating their debt remained the same. However, there were still one in four SMEs that stated their monthly amount of debt had increased in the last 12 months.

“Relatively constant debt levels indicate stable business conditions, but our message is that constant debt, even at lower levels, can be a thorn in the side of many small businesses who depend on a healthy cashflow from month to month to meet their own commitments,” Mendelson said. “We can see SMEs beginning to tighten their business practices. Business sentiment in the sector generally remains positive, but we can see SMEs also recognise the importance of staying in control of their cashflow, they are acutely aware of the impact of a few bad debts on cashflow.”