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More than 5,000 businesses could be at risk of default over the next 12 months, warns the credit agency.
The September 2022 CreditorWatch Business Risk Index (BRI) has revealed the risk of default over the next 12 months has increased in all regions across Australia, with the exception of the Lower Hunter and Wyong regions in NSW.
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The BRI reported 5,000 or more registered businesses were now at risk.
The data comes as Australia’s cash rate hit 2.6 per cent in October, with further hikes expected, and fears escalate over a global recession.
While businesses have been relatively resilient to the cash rate hikes that began in May, the cost of increasing credit is beginning to catch up and economists are now waiting on the full impact of interest rate rises to hit.
CreditorWatch chief executive Patrick Coghlan said B2B trade payment defaults showed a dip this month; however, these remain well above levels seen in September last year during COVID and are a lead indicator of future defaults.
“Payment defaults are hugely significant and are a key indicator of coming delinquency for the debtor/customer,” Mr Coghlan said.
“A business with a trade payment default are seven times the default risk compared to a business with a clean payment record.”
He said approximately 25 per cent of businesses with default end up in administration within 12 months.
Indeed, as businesses default on payments, pressure on the supplier who will now have to shoulder that bad debt increases.
However, the data noted while external administrations remain significantly up from last year and up 42 per cent since January, they had dropped for the second month in a row following a seasonal pattern.
The food and beverage services are facing a 7.2 per cent probability of default over the coming 12 months, followed by art and recreation services (4.7 per cent) and education and training (4.6 per cent probability).
Trade activity on the mend post-COVID
The data also showed year-on-year growth in B2B trade receivables continues to increase that pointed to a “continued recovery in trade activity for small businesses” since COVID.
However, while trade activity is returning to more normal levels, this was after a sustained period of declining activity, and figures remained well below pre-COVID levels.
Weighing in, the group’s chief economist Anneke Thompson said while trade activity was very strong, medium and longer-term risk was heightened.
“The data suggests there are still limits to activity impacting our customers that weren’t there pre-Covid,” Ms Thompson said.
“These limits are likely the lack of or long delay in receiving supplies, particularly in the construction sector, as well as labour shortages preventing expansion or businesses operating at full capacity.”
Ms Thompson conceded while the labour force data is still very tight the vacancy data suggests that jobs are now starting to be filled at a greater rate and businesses have slowed their appetite for employees.
“It may take some months before this slowdown starts to show up in labour force data, but clearly the RBA are being more cautious in their approach to monetary policy tightening as some indicators start to show that their cash rate hikes are starting to take effect,” Ms Thompson said.
The research from CreditorWatch has preceded The Adviser's SME Broker Bootcamp – which is due to take place across three states in November – where brokers will hear about why diversifying into SME lending and servicing business clients could be beneficial for their brokerages, how they as financial professionals could play a critical role in managing SME clients' funding requirements during these challenging periods to meet their growth profile and working capital requirements.
Brokers will also learn about the financial gains and risk/reward payout of diversifying, how long it could take, the skills required to successfully tap into SME lending, and the key to producing quality lending submissions to meet clients’ funding needs.
The event will be held in the following locations:
- Thursday, 17 November: Waters Edge, Portside Wharf, Brisbane
- Tuesday, 22 November: Parkroyal, Parramatta, Sydney
- Thursday, 24 November: Crown Promenade, Southbank, Melbourne
Click here to register for free and make sure you don’t miss out!
For more information, including agenda and speakers, click here.
[Related: Business insolvencies to rise over 2022: CreditorWatch]
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