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Policymakers should gradually ease stimulus measures for “zombie” SMEs to prevent a sharp spike in business closures, according to a credit reporting agency.
New data from digital credit reporting agency CreditorWatch has indicated that while the number of businesses entering administration has been at low levels since April 2020, many businesses may be being kept artificially afloat due to stimulus measures.
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CreditorWatch CEO Patrick Coghlan expressed concerns that this could mean that thousands of companies that would have ordinarily gone into administration have avoided doing so because of government stimulus measures, meaning that creditors and policymakers need to brace themselves for a sharp market readjustment when the government support ends.
He explained: “While at first glance, a decrease in business administrations, defaults and payment times seems to indicate green shoots appearing in our economy, we should be cautious.
“Payment times remain high, indicating significant cash flow issues, while the number of companies going into administration is far below the monthly average we would expect, telling us that many firms are being artificially propped up.”
The data indicated that there are some positive signs of stability in the SME sector, but these were insufficient to allay concerns about the overall health of the Australian economy.
According to CreditorWatch, the number of businesses defaulting on payments fell by 13.2 per cent in July and average days to payment decreased by 7.6 per cent across all sectors.
However, payment times have remained 224 per cent higher than July 2019 across all sectors, while the number of business administrations in July has simultaneously fallen by 11.6 per cent.
The industries that showed the greatest fall in payment times were:
- Arts and recreation: Days overdue fell to 26 days overdue in July 2020 – down 34 days but still 160 per cent above July 2019;
- Finance and insurance: Fell to 42 days overdue in July 2020 – down 33 days but still 500 per cent above July 2019;
- Healthcare and social assistance: fell to 34 days overdue in July 2020 – down 18 days from June but still 209 per cent above July 2019; and
- Construction: fell to 41 days overdue in June 2020 – down one day from June but still up 241 per cent compared with July 2019.
Mr Coghlan warned that while credit defaults and payment times could fall further, it would be “premature” to call these green shoots.
“Until now, the priority has been to keep as many businesses as possible above water,” he said.
“The extension of JobKeeper measures to March 2021 and the mooted extension of Safe Harbour measures, including high limits on the amount of debt that SMEs can incur while still trading, will keep SMEs afloat.
“However, the number of ‘zombie companies’ – those being kept out of administration artificially – continues to grow, and policymakers need to consider the gradual easing of measures to ensure good money is not being thrown away on bad companies,” he said.
“Just as investors are watching listed companies closely during the reporting season to ensure they are not hiding behind government payments, creditors need to be keeping close tabs on SME market confidence and are working with debtors to build sustainable cash flow.”
The issue of payment times in the SME sector has been raised frequently in the past few months, with the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell calling on the government to create new laws to provide greater protections for SMEs against unfair payment practices.
Among the recommendations made in the ASBFEO’s final report from the supply chain finance, Ms Carnell called on government to legislate for a mandatory standardised payment term of 30 days or less from receipt of invoices from small businesses.
[Related: Major bank calls for long-term SME reform]
