Insolvencies in the retail sector to increase: CreditorWatch

According to CreditorWatch, food retailing made up 9.41 per cent of invoices that were more than 60 days overdue, the largest proportion across the industries.

Anneke Thompson, CreditorWatch’s chief economist, said that she expects insolvencies in the retail sector to increase, particularly for “smaller, discretionary retailers” due to weak Australian consumer confidence that is unlikely to improve until there are cuts in the cash rate.

The chief economist explained: “Only then will mortgage holders start to feel more confident that they have some breathing space in their monthly budget.”

Shubham Bhaskar, finance broker and director of Sheel Capital, told The Adviser that he had also noticed a “concerning uptick” in insolvencies within the food and fuel sectors.

He said: “With the elevated interest rates and higher cost of living, the first thing the consumers cut as an expense is eating out and the second is purchasing non-essential items.”

David Picca, director and founder of Alexander Financial Group, said that the increase in insolvencies was caused by rapid rate increases and cost of living. Picca added that he had noticed a “spike” in defaults of clients’ comprehensive credit reports.

Anneke revealed that the retail trade sector has had a 35 per cent increase in insolvency rates since April 2023.

Further, the credit reporting agency has found that fuel retailing had the highest external administration rate of 0.81 per cent over the last 12 months. Food retailing had an external administration rate of 0.6 per cent over the last year.

CreditorWatch said that the food retailing sector has faced pressures including a trend of consumers moving from smaller food suppliers to “larger value supermarket chains” and a higher proportion of overdue invoices.

Speaking with The Adviser, Mihir Gandhi, finance broker and director of Flawless Financial Services, said that he had noticed an increase in retail insolvencies with his clients due to a lack of staff, higher costs to run their businesses, and a shortage of supplies.

According to the Australian Tax Office (ATO), 10.6 per cent of all ATO tax defaults currently lodged are from the retail trade sector. The food retailing sector made up 14 per cent of the retail trade ATO tax defaults.

How are brokers supporting retail clients?

Gandhi said that he has been supporting his clients with cashflow finance to “prolong” a business's time in operation.

He said: “The most important thing for any retail business is to prolong the time in business for which cash flow is imperative. These clients require cash flow to weather the storm and once everything settles down and business is back to normal they can refinance or pay off these loans.”

Bhaskar said that he had been supporting clients by focusing on “pro-active risk management and strategic financial planning to mitigate the challenges faced by SMEs in these sectors”.

South Australian broker, Picca, said that he supports clients by offering individual advice specific to their circumstances.

He continued: “Their needs are often repayment of mortgage, sometimes consolidating their debts that are affected by high interest rates, but most importantly, helping to refinance so that they can free up cash flow to tackle the cost of living crisis.

“In general, I’m often working with clients to help them understand that sometimes the next 12 months is a sacrifice for the greater benefit.”

Gandhi noted that he had been using non-bank lenders including Prospa, Shift, and Lumi to support his clients with cash flow finance. He continued that it was “fairly hard” for retail clients to get unsecured business loans from the major banks.

Picca said that he has used non-bank lenders in the past year to support SME clients pay off overdue tax debts to “streamline cash flow and reduce tax stress on the client”.

Speaking on the lenders that Bhaskar uses for his for retail clients, he said: “Standouts in our business include Judo Bank, [which is] focussing more on the character of the sponsors and backing the businesses showing some agility in decision making and supporting the growth in SMEs.”

[Related: SME invoice payment defaults at record high: CreditorWatch]