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Latest CreditorWatch data shows increasing signs of small businesses in distress.
A surge in trade payment defaults revealed increasing distress among SMEs and “is a portent of things to come for the wider economy”, says CreditorWatch in its latest risk data.
Business-to-business payment defaults have risen 53 per cent year-on-year and hit their highest point since October 2020, during the height of the pandemic, the agency’s August Business Risk Index showed.
Also on the rise are court actions, up 51 per cent compared to a year ago, and external administrations, which have leapt 129 per cent since January.
CreditorWatch chief executive Patrick Coghlan said the trend in payment defaults was disturbing but not unexpected.
“Our Business Risk Index data has been forecasting a rise in B2B payment defaults for some time now,” he said.
“The multiple challenges confronting many businesses, whether they be rising inflation and interest rates, labour shortages or the ongoing impacts of the COVID pandemic, are all conspiring to make it that much tougher to pay invoices.”
CreditorWatch chief economist Anneke Thompson said there were mixed economic signals but the signs were clear.
So compared with the period of pandemic lockdown last year, trade receivables were up 11 per cent, retail sales were strong and even the NAB’s consumer sentiment index had rebounded.
But labour costs were on the rise, with capacity utilisation at a record high of 86.7 per cent, while purchase costs grew by 5.4 per cent. These increases were being passed on by businesses, leading to rising in retail prices.
“What this tells us is that we are clearly still in the early stages of adjustment to new economic conditions,” Ms Thompson said. “However, given CreditorWatch data is mostly sourced from small and medium sized businesses, we feel that the increasing signs of distress in the form of higher B2B trade payment defaults is a portent of things to come for the wider economy.”
She said recent interest rate increases had yet to be fully felt by mortgage holders and businesses.
“The financial impact of monetary policy tightening does take some time to be felt in the repayments schedule of mortgage and business loan holders,” she said.
“We expect that the real pressure will start to mount by October-November, right before the Christmas shopping period. The RBA will be watching consumer spending patterns intently over this time to gauge any change in the behaviour of consumers.”
Small businesses were generally least able to handle interest rate increases and other rising costs due to thin margins and low cash reserves.
“Based on our data, small businesses are usually most susceptible to their invoices being paid late, putting further pressure on cash flow,” the report said.
Industries with the highest probability of default over the next 12 months were food and beverage services at 7.2 per cent, arts and recreation services at 4.68 per cent, and education and training at 4.63 per cent.
“The industries that are most at risk of default continue to be those where consumers can quickly withdraw spending,” CreditorWatch said. “The education and training sector is highly dependent on offshore students for revenue, making it more risky.
“Our data continues to give us strong leading indicators that more small businesses are falling into distress. One of the first signs of this is businesses defaulting against another due to non-payment.
“The rise in these numbers is much faster than the increase in trade receivables, therefore cannot be attributed to increased turnover. We expect that external administrations and court actions will see trend growth going forward.”
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