Small businesses bear brunt of late payments

Find out which industry has biggest proportion of arrears…

Small businesses bear brunt of late payments

Small businesses are the main casualties of late payers, according to the latest CreditorWatch report which shows late payments for smaller firms are averaging three times that of bigger firms.

The proportional difference highlights challenges experienced by small businesses in enforcing payment terms and collecting on payment arrears, the credit agency said.

Releasing its October CreditorWatch Business Risk Index (BRI) report, CreditorWatch said business-to-business payment defaults rose at an average rate of 20% per month over the last year.

Trade payments data by industry showed the construction industry held the biggest portion of arrears (60 days or more) at 11.6% of which 9.4% were to small businesses and 2.2% were to big businesses. This was followed by transport, postal and warehousing (10.2%) and accommodation, food and beverage services (9.9%).   

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Trade receivables (the amount owed to a business by its customers following the sale of goods or services on credit), dropped 18% over the October month, the lowest level since October 2021. Growth in trade receivables was flat year-on-year, which CreditorWatch said pointed to a softening in recent small business trade activity recovery.

Trade turnover remained robust for bigger firms. CreditorWatch data showed a 14% increase in revenue from FY21 to FY22 across all public companies and ASIC reporting entities. Despite reduced margins, profits were up 9% year-on-year.

External administrations dropped 34% since September, while court actions dropped 26%, but remained up 50% year-on-year, CreditorWatch said.

CreditorWatch CEO Patrick Coghlan (pictured above left) said the October data highlighted that small businesses had reduced capacity to enforce payment terms and collect arrears, and that this had started to impact trade.

“Trade receivables continue to decline and trade payments defaults, a lead indicator of insolvencies, are at their highest point since October 2020,” Coghlan said.

CreditorWatch chief economist Anneke Thompson (pictured above right) said consumer and business confidence, job vacancies and business-to-business trade defaults (almost all of the forward indicators) showed clear signs of deterioration.

Although this seemed unwanted, a significant economic slowdown was the result of curbing inflation, she said. The challenge was to protect small businesses from bearing the brunt of the impact, which Thompson said was an expected outcome.

“Small businesses need to exercise extreme financial discipline, and we are already seeing signs of this in increasing business-to-business trade defaults, as this means businesses are taking action when they are not getting paid,” Thompson said. “Over the next year to two years, cash flow will be king, and small businesses should be as ruthless as big business in demanding invoices owed and using all resources available.”

The five regions most at risk of default over the next 12 months are:

  1. Merrylands-Guildford (NSW): 7.79%
  2. Canterbury (NSW): 7.55%
  3. Auburn (NSW): 7.44%
  4. Surfers Paradise (QLD): 7.42%
  5. Ormeau-Oxenford (QLD): 7.38%

The five regions least at risk of default over the next 12 months are:

  1. Yarra Ranges (VIC) 4.81%
  2. Cottesloe-Claremont (WA): 4.92%
  3. Adelaide City (SA): 4.95%
  4. Ku-ring-gai (NSW): 5.01%
  5. Geelong (VIC): 5.01%

According to CreditorWatch, industries with the highest probability of default over the next year are good and beverage services, arts and recreation services and transport, postal and warehousing.  The industries considered to pose the lowest probability of default are health care and social assistance, agriculture, forestry and fishing, and manufacturing.

Read next: What’s happening to Australian business confidence?

Areas with high levels of personal insolvency were the most exposed to business insolvency, CreditorWatch said.  The credit agency expects this to be a continuing trend, noting that personal and businesses finances “tend to blur” in times of high financial pressure.

Despite not being evident in retail trade data, CreditorWatch said discretionary spending had already begun to slow.  The Christmas period, typically a time of increased spending volumes, would be telling for many businesses and would likely set the scene for 2023, it said.

In response to the needs of small businesses, the credit agency recently launched CreditorWatch Collect, an automated receivables management software and collections service.