Business insolvencies to rise, credit agency warns

Key indicators paint sobering picture

Business insolvencies to rise, credit agency warns

There’s heightened risk that more small businesses will fold as they grapple with rising interest rates, higher costs, and labor shortages, CreditorWatch’s latest report shows.

Following a significant annual increase in trade payment defaults – which are at the highest level since October 2020 – the credit agency anticipates more business insolvencies are ahead.

The August 2022 CreditorWatch Business Risk Index (BRI) shows trade payment defaults increased 53% year-on-year, while court actions were up 51%. External administrations were up 58% year-on-year (up 129% since January) but dropped 9% month-on-month.

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More positively, average trade receivables, the amount owed to a business by its customers following the sale of goods or services on credit, were up 11% year-on-year, marking the second-highest point since mid-2021.

The BRI, which ranked over 300 regions by relative insolvency risk based on data from around 1.1 million ASIC-registered credit-active businesses, shows the national probability of default remained flat at 5.8% in August.

CreditorWatch CEO Patrick Coghlan (pictured above left) said rising payment defaults were not unexpected, the BRI having forecast a rise in business-to-business payment defaults for some time.

“The multiple challenges confronting many businesses, whether they be rising inflation and interest rates, labour shortages or the ongoing impacts of the COVID-19 pandemic, are all conspiring to make it that much tougher to pay invoices,” Coghlan said.

CreditorWatch chief economist Anneke Thompson (pictured above right) said the official cash rate increases over May to September were yet to be fully felt by borrowers, many of whom were ahead on their repayments or on fixed rate loans. CreditorWatch expects pressure to mount by October and November, Thompson said. 

While the trade payment defaults index had been rising for some time, other economic data was more inconsistent, she said. 

Consumer sentiment has been declining, yet retail sales have held up, Thompson said.  NAB’s latest business sentiment survey showed an increase in their index, following a period of worsening.  Capacity utilisation (a leading indicator of changes in unemployment) rose to 86.7%, spurring a 4.6% increase in labour costs, and purchase costs grew by 5.4%.

“Businesses are able to pass these cost increases on to consumers at this stage, with overall product prices increasing by 2.7% and retail prices by 3.3%,” Thompson said.

While the mixed data indicated the country was still in the early stages of adjustment to new economic conditions, CreditorWatch data, which was mostly sourced from SMEs, indicated many were feeling the pinch.

“We feel that the increasing signs of distress in the form of higher B2B trade payment defaults is a portent of things to come for the wider economy,” Thompson said.

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Of regions with over 5,000 businesses, Merrylands-Guildford and Canterbury (both in NSW) were the most at risk of default, due to above average personal insolvency rates and below average personal incomes. 

Regions representing the lowest risk of default, of which the two lowest were Cottesloe-Claremont (Western Australia) and Adelaide City (South Australia) were mostly low-density locations with above average personal incomes, CreditorWatch said.

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

  1. Merrylands-Guildford (NSW): 7.78%
  2. Canterbury (NSW): 7.52%
  3. Surfers Paradise (Qld): 7.46%
  4. Auburn (NSW): 7.41%
  5. Ormeau-Oxenford (Qld): 7.38%

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

  1. Cottesloe-Claremont (WA): 4.91%
  2. Adelaide City (SA): 4.93%
  3. Yarra Ranges (Vic): 4.93%
  4. Ku-ring-gai (NSW): 5%
  5. Geelong (Vic): 5.04%

According to CreditorWatch, industries with the highest probability of default over the next year include food and beverage services, arts and recreation services, and education and training. The industries considered to pose the lowest probability of default include health care and social assistance, agriculture, forestry and fishing, and manufacturing.

CreditorWatch said data continued to provide strong leading indicators that more small businesses were falling into distress, and that one of the first signs was a business defaulting against another due to non-payment.

“The rise in these number is much faster than the increase in trade receivables, therefore cannot be attributed to increased turnover. We expect that external administrations and court actions with see trend growth going forward,” it said.