Is the rise in defaults a wake-up call for small business?

New data from digital credit agency CreditorWatch suggests that small business insolvencies are likely to increase in 2020 with defaults on the rise.

While 14 per cent fewer small businesses became insolvent in 2019 compared to 2018, there was a 30 per cent increase in payment defaults year-on-year, which Creditor Watch CEO Patrick Coghlan suggests indicates business owners could be in for a tough time ahead.

 “There’s a clear path that most businesses follow to administration. The first red flag is the registration of payment defaults before businesses find themselves embroiled in court action. Finally, burdened with the costs and unable to meet their financial requirements, they become insolvent. For those paying close attention, the registration of payment defaults against a business should send alarm bells ringing. In fact, CreditorWatch statistics show that 50 per cent of companies that incur a payment default go into administration within 18 months,” Coghlan said.

State-wide increases, but Tasmania bucks the trend

The number of court actions registered against small businesses increased YoY in all states, except Tasmania: 

• South Australia: court actions increased 57 percent from 2018-2019
• New South Wales: court actions increased 39 percent from 2018-2019
• Western Australia: court actions increased 33 percent from 2018-2019
• Victoria: court actions increased 4 percent from 2018-2019
• Tasmania: court actions decreased 35 percent from 2018-2019

‘Days to payment’ reveal riskiest industries

Despite a strong start to the year, a number of industries continue to be slow paying:

• Construction 64 days in Q4 2019 
• IT, Media and Telco 62 days in Q4 2019 
• Financial Services 63 days in Q4 2019 
• Rental, Hiring and Real Estate 66 days in Q4 2019 
• Admin and Support Services 90 days in Q4 2019 

Commenting on the annual and quarterly findings, Coghlan said, “While a decrease in business insolvencies from 2018-2019 suggests a strengthened Australian economy, a deeper dive into the figures suggests that storm clouds may be gathering. 

“Year-on-year increases in defaults and court actions, including big jumps from Q3 and Q4 2018 to 2019, indicate SMEs are struggling to make ends meet. We’re likely therefore to see an increase in company failures over the next 12 months.

“Within complex supply networks, one payment default can have a disproportionate effect, ultimately leading to failed businesses and lost livelihoods. Business owners should help secure their futures – as well as those of their workforce – by communicating with debtors and creditors and adopting technology to help them spot possible bumps in the road ahead.”