CreditorWatch reveals business crash crunch as defaults rise

Small businesses are bearing the brunt of the economic downturn, with a squeeze on cashflow pushing payment defaults to a two-year high.

Businesses in the construction industry are slowest at paying their bills.

Australia’s small businesses are bearing the brunt of the economic downturn, with surging interest rates and runaway inflation creating a squeeze on cashflow and pushing payment defaults to a two-year high, according to CreditorWatch’s latest business risk index.

Payment defaults have increased at an average rate of 20 per cent per month over the past year, according to CreditorWatch, with late payments to small businesses three times higher than the big end of town.

Meanwhile trade receivables for small businesses — the income expected to be paid from customers in the future — have dropped 18 per cent in the past month, to the lowest level since October last year in a further sign of emerging liquidity challenges across the economy.

CreditorWatch says that at the same time big business has weathered the economic storm relatively well, with revenue across ASX-listed companies and ASIC reporting entities up 14 per cent in 2022 and profits up 9 per cent despite reduced margins.

CreditorWatch chief executive Patrick Coghlan said the trends showed an increasing divide in how small and big businesses were coping with the economic headwinds.

“Our Business Risk Index data highlights that small business’s limited capacity to enforce payment terms and collect payment arrears is having a significant impact,” he said.

“Trade receivables continue to decline and trade payment defaults, a lead indicator of insolvencies, are at their highest point since October 2020.

“Small businesses are crying out for additional support.”

While the number of business insolvencies fell for a third consecutive month in October, the general trend is upwards, with administrator and liquidator appointments creeping back up to pre-Covid levels as the ATO looks to wind back its ballooning debt pile.

A near three-year pause on ATO enforcement action, coupled with temporary changes to insolvency rules designed to protect vulnerable businesses during the height of the pandemic, has kept a lid on insolvency rates.

But with those protections no longer in place, insolvency experts are predicting a wave of insolvencies and distressed M&A activity heading into 2023.

A survey released on Tuesday by KordaMentha and the Turnaround Management Association found three quarters of business turnaround experts expect M&A transactions involving distressed assets to increase over the next 12 months.

More than a third of respondents expect Australia to dip into a recession over the next 12 months, and another quarter are predicting a recession the year after.

KordaMentha partner and president-elect of the Turnaround Management Association Chris Martin said that while there was a strong desire from struggling businesses to avoid formal insolvency, the biggest barrier to M&A deals and capital raisings was uncertainty over valuations.

“Given the desire of stakeholders and companies to avoid formal insolvency, it’s no surprise that informal restructuring and turnaround options are expected to be a preferred pathway for distressed organisations,” he said.

“However, with the business terrain getting more challenging by the day, debt and equity stakeholders need to get confidence in the valuation outlook.

“While shareholders and financiers have shown a preparedness to support organisations through difficult times, they are increasingly being asked to catch a falling knife at the same time as their budgets and performance are under pressure.”

From an industry perspective, payment defaults in the construction, retail, transport and hospitality sectors are among the highest, making them most vulnerable to insolvency, according to CreditorWatch.

Businesses in the construction industry are slowest at paying their bills with one in ten, or 11.6 per cent, of payments more than 60 days overdue.

Close to 10 per cent of payments in the accommodation, food and beverage services sector are 60-plus days in arrears, and that industry is seen as having the highest probability of default over the next year as Australian consumers tighten their belts in the lead-up to the crucial Christmas spending period.

CreditorWatch chief economist Anneke Thompson said Christmas trade activity would be telling for many businesses, and would set the scene for retail trade in 2023.

“The upcoming Christmas retail spending period will be a fascinating one to watch, but it is almost certain that consumers will have less to spend than they did last year,” she said.

“Christmas 2021 came at a time when many consumers had not had a lot to spend their money on for two years.

“Christmas 2022 follows a period of very high inflation, the ATO normalising their collection patterns, and of course higher interest rates.

“Therefore, we expect the risk of default for retail businesses to rise, even if slightly, as they enter some of the most difficult trading conditions experienced for some time.”

Queensland is ranked as the most vulnerable state when it comes to the probability of business insolvency, while South Australia and Tasmania, which both fared relatively well during the pandemic, are ranked as the best performing states with the lowest insolvency risk.

Originally published as CreditorWatch reveals business crash crunch as defaults rise