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A new record for business insolvencies has been reached as payment defaults soar, the credit reporting agency has said.
CreditorWatch has revealed that business insolvencies reached a record high of 1,378 last month, a 38 per cent increase in the rate of insolvencies over the 12 months to May 2024.
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The credit reporting agency found that the total number of insolvencies has increased 34 per cent year on year and is currently 41 per cent above the pre-COVID-19 record of 978, which was reached in July 2019.
The electricity, gas, water, and waste services sector had the most significant rate of increase in business insolvencies year on year, up 89 per cent in the year to April 2024, compared to the 12 months to April 2023.
CreditorWatch said that the increase in insolvency rate in the electricity, gas, water, and waste services sector was driven primarily by small businesses, which are entering external administration at a rate of 1.16 per cent as of May 2024. This is in comparison to a 0.51 per cent external administration in May 2023.
Businesses in the education and training sector had the next most significant increase in business insolvencies, having increased 87 per cent year on year, with “almost all” insolvencies coming from small businesses, the credit reporting agency said.
CreditorWatch said that conditions in the education and training sector are likely to “get far more challenging” as the number of international students coming to Australia decreases.
Payment defaults hit a record high
Business-to-business (B2B) payment defaults have hit a new record high, with CreditorWatch’s B2B Trade Payment Default Index reaching 146 bps in May 2024.
The index has increased 21 per cent from the April 2024 payment default index, which previously hit a record high of just over 120 bps and a 58 per cent year-on-year increase.
According to CreditorWatch, the construction industry has had the highest proportion of late payments, with 10.46 per cent of businesses having payments that are 60 or more days overdue.
The food and beverage services industry follows behind at 8.75 per cent of business payments more than 60 days late and the financial and insurance services industry at 8.74 per cent of businesses.
The credit reporting agency found that there is a strong correlation between payment defaults and business failure, as a business has a 20 per cent chance of failure in the 12 months after a payment default.
If a business has two payment defaults against it, the likelihood of business failure increases to 42 per cent and up to 62 per cent after three defaults.
Anneke Thompson, CreditorWatch’s chief economist, said that record-high payment defaults indicate that there are increasing cash flow issues for Australian businesses.
SME lender Prospa revealed in recent research that 22 per cent of SMEs have no cash reserves whatsoever to rely on. A further 18 per cent said that they are reliant on less than one month’s worth of cash flow.
The lender revealed that 21 per cent of SMEs expect to run out of cash reserves in one to two months.
Speaking on The Adviser’s In Focus podcast, Prospa’s general manager of sales & partnerships Roberto Sanz said that SMEs should be holding between three and six months’ worth of expenses to rely on.
Sanz said: “With the [Australian Taxation Office’s] new measures targeting tax debts, many businesses are struggling to meet their financial obligations with their suppliers. This ripple effect in B2B is expected to continue as interest rates remain elevated.”
To improve cash flow and productivity for SMEs, the Albanese government announced that it is investing $23.3 million to help small businesses adopt eInvoicing, which it said should reduce the risk of invoice scams.
Thompson commented that the reduction of spending from consumers due to elevated inflation and high interest rates has had a flow-on effect on businesses.
She said: “This trend took some time to flow through to businesses but is now showing up in the data in the form of increasing late payment rates and rising court actions, as well as increased business failures and insolvencies.
“Despite income tax cuts taking effect in July 2024, it is likely that the remainder of 2024 will be extremely challenging for businesses, as interest rates are unlikely to fall before the end of the year, and money flowing through the economy is focused on non-discretionary goods and services.”
[Related: Over 1 in 5 SMEs have no cash reserves left: Report]
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