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‘Zombie businesses’ to emerge come September, research finds

Adrian Flores
Adrian Flores
16 July 2020 1 minute readShare
zombie business

A credit reporting agency predicts an increasing number of SMEs across the country are remaining propped up by government support and are simply delaying entering into administration ahead of support measures ending in September.

The CreditorWatch data reveals a 20 per cent decrease in the number of SMEs entering into administration from May to June which is also 50 per cent lesser than in June 2019. 

The research said that while the data for June, showing a 17 per cent decrease in court actions and a 25 per cent decrease in payment defaults, would traditionally indicate a healthy economy, policymakers should be concerned. 

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Another telling sign SMEs are struggling to make ends meet is data that is showing significant payment delays, CreditorWatch said.

Payments in June were overdue by an average of 49 days across all industries, 342 per cent higher than the June 2019 figure.

 

The growth was even greater across industries like arts and recreation, up by 900 per cent, and retail, up by 367 per cent.

As well as arts and recreation and retail, significant increases in payment times from June 2019 to June 2020 suggest that SMEs in other industries are relying heavily on government subsidies to survive, including:

  • Construction increased to 53 days overdue in June 2020 – up by 253 per cent compared with June 2019
  • Rental, riring and real estate services increased to 70 days in June 2020 – up by 678 per cent compared with June 2019
  • Electricity, gas, water and waste services increased to 37 days overdue in June 2020 – up by 311 per cent compared with June 2019
  • Healthcare and social assistance increased to 52 days overdue – up by 643 per cent compared with June 2019

“While at first glance a decrease in business administrations, court actions and defaults seems to indicate a rebounding economy, however when we take a deeper look, it’s clear that trouble is brewing and that businesses are struggling with significant cash-flow issues,” said CreditorWatch chief executive Patrick Coghlan.

“As a result, we’re likely to see a significant jump in the number of businesses coming out of hibernation and entering into administration in the coming months.”

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Mr Coghlan said that stimulus packages like JobKeeper, JobSeeker, mortgage holidays and the much-needed safe harbour changes have provided businesses with a buffer of protection.

Until now, he said the priority has been to keep as many businesses as possible above water, but come September, support packages will be lifted and we’ll find that a substantial number of “zombie businesses” have been kept artificially afloat.

“Banks will not be prepared to prop unviable companies and nor should taxpayers; however, the government can ease the impending insolvency curve by lifting safe harbour measures gradually and forming an administration service to support the industry,” Mr Coghlan said.

‘Zombie businesses’ to emerge come September, research finds
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Adrian Flores
Adrian Flores

Adrian Flores is the deputy editor of MyBusiness. Before that, he was the deputy editor for SMSF Adviser as well as features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.

You can email Adrian at [email protected].

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