Business insolvencies set to rise, say credit managers

High interest rates, inflation create a 'perfect storm'

Business insolvencies set to rise, say credit managers

The current economic climate and expected slowdown is eliciting a more cautious approach from credit managers, according to a latest Equifax report.

Australian credit managers expect business insolvencies and delinquencies to rise over the next six to 12 months, as concerns around interest rate rises, supply chain delays and stock availability, input costs and global economic pressures build.

In an 11th annual national credit managers’ survey, released in October, Equifax assessed the role of credit management in Australian businesses, and the importance of a “360-degree customer view” when managing credit risk.

Equifax general manager commercial Scott Mason (pictured above left) said the level of optimism observed in 2021 had “taken a hit”. Many credit managers were concerned about how their customers would weather the “perfect storm” of higher interest rates, elevated inflation, and the gloomy and uncertain economic outlook, he said.

“We anticipate that the shift from credit management to risk management will ramp up significantly as a result, and they will need as much insight into their customers as possible to make accurate decisions about risk,” Mason said.

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After economic concerns, finding and attracting quality customers was the second leading issue for credit management companies to manage over the next six months, he said. 

Equifax referred to ASIC data, which showed an upward trend in business insolvencies in 2022, largely driven by “creditor wind ups and companies going into voluntary administration”.

Customers previously considered “high quality” may recently have experienced a change in their risk profile, the data and analytics provider warned.

Credit managers surveyed by Equifax identified three ways they could manage the change in risk.  They were:

  1. Monitor high-risk customers more closely
  2. Review risk within their portfolios
  3. Increase account reviews

Almost two-thirds (65%) of credit managers said they planned to tighten collections this year, up from just over half (53%) last year, Equifax said.

Managing risk against more volatile economic conditions would take precedence over credit managers’ focus on enhancing processes, the company said.

Equifax advises credit managers to “gain a clearer understanding” of the people behind the businesses they’re working with.

This 360-degree view of business customers is particularly important for businesses operating within sectors exposed to market and supply chain disruption, it said.

Sole traders in the construction industry were “twice as likely” to be in mortgage arrears than the average customer, Equifax data showed. Compared to the national average, SMEs and sole traders operating in accommodation and food services, construction, and wholesale trade were more likely to have personal loan arrears of 30 or more days.

Mason said credit managers were aware that broader economic conditions affect how they approach high-risk customers. Many smaller operators were already experiencing financial pressures, and some may be dipping into their personal finances to keep their business afloat, he said.

“Understanding the pain points of the people behind the businesses in their portfolios will help credit managers minimise cash flow exposure and prevent regulatory scrutiny and financial and reputational damage for their customers,” Mason said.

Understanding the people behind the business would enable credit managers to take immediate action, to help them better prepare for turbulence down the line.

“These actions could include identifying customers that are exhibiting signs of financial difficulty and adapting their collection and lending risk parameters accordingly; being more vigilant and taking action sooner around late payers; and ensuring their PPSR registrations are up to date and correct, to protect against loss if a customer goes into administration,” Mason said.

In response to current challenges businesses are facing, Grow Finance co-CEO David Verschoor (pictured above right) said he agreed with the view that credit managers should aim to understand more about the pain points within a business when assessing risk.  Grow Finance often benchmarks and embraces these pain points and will look at those niche businesses to understand the risks, he said.

“Particularly when looking at a bank statements underwrite, we look at proving profitability through that approach, rather than having to use historical financials as a way to do that,” Verschoor said.

Verschoor said that businesses often needed additional finance, but don’t have sufficient time to pull all the financial information together.

They typically don’t have up-to-date financials (e.g. management reports and forecasts) available at short notice, he  said.

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In response to this challenge, businesses that have a strong track record of repaying an asset could consider the Grow Finance balloon refinance product. An example might be a truck that’s reached the end of its five-year term, the lending was organised by the bank or retailer, and now needs a balloon refinance.

“We don’t need financials for that – we do it on a low-doc loan, and that’s been a strong performing niche product for us,” Verschoor said.

Often, an alternative solution can be found for a client who has difficulty meeting the risk parameters for a certain type of loan, he said.

One example is where Grow Finance had a client with a two-year track record, who wanted to extend their trade finance loan.  Rather than extend the loan, Grow Finance put together a repurchase plan of plant and equipment the client owned outright, using a different product to solve their problem, he said. 

“This was achieved without extending the loan on the other side of the balance sheet that didn’t necessarily have the risk parameters to meet the type of loan the [client] was looking for.