The research by credit information supplier Equifax found that the four-year mark is the most dangerous period for SMEs, with companies in their fourth year of operation accounting for the highest proportion of business failures.
“When a business increases its volume and type of credit enquiries, its risk of default or other adverse events rises in parallel,” said Justin Eley, senior product manager, commercial risk at Equifax.
“For SMEs, a spike in credit enquiries is an expected result of deciding to grow a business that has been established and proven its financial viability for a reasonable stretch of time – frequently after around four years.
“Pushing for growth or expansion in any business is a calculated risk, a large part of which is financial. With this in mind, the spike in failure events (external administrations) for SMEs from their fourth year through to their sixth year can be viewed as part of the business life cycle and should be a factor in any credit decision.”
According to Mr Eley, the construction industry unsurprisingly tops the list of the highest risk industries. This is followed by retail trade and manufacturing.
“While the construction and manufacturing sectors feature prominently in the riskiest industries, our data also suggests that the retail sector is currently a high-risk industry. As retailers face increased pressure from global brands and online market entrants, the risk factor of this sector is also likely to grow,” he said.
Mr Eley said that knowing this key-risk period in advance can help business leaders to plan ahead and avoid the worst outcome. He offered these tips managing a company credit profile:
- Know where you stand: Trying to improve or maintain your business credit profile without knowing where it currently stands is like flying blind. Business credit reporting services allow SMEs to understand their situation and manage their credit accordingly.
- Be prudent when applying for credit: Do your analysis of the best credit for your business situation before actually making the application. Applications all have an impact on a business credit score – not just the credit that has been taken up.
- Think ahead: Managing cash flow is a key challenge for SMEs, so building a buffer in terms of time or available money wherever possible will help business owners be ready in periods of growth or if they run into difficulty. Knowing how your customers pay others can also give you insight into when you can expect to be paid, and have early visibility of payment stress that could impact your business.
- Understand payment terms: Staying on top of payments is vital to maintaining a healthy credit profile, and paying on time can help improve the credit risk of an SME. This is particularly important when asking lenders to provide considerable amounts of credit, for example, during business set up or periods of growth.
- Be aware of external factors: What a business owes the Tax Office might not seem relevant to its credit profile, but draft legislation has been put forward that will allow the ATO to report companies’ overdue tax debts to commercial bureaus, if the debt is more than $10,000 and has been overdue for more than 90 days. Having a broad awareness of factors such as regulatory changes can help avoid accidentally ruining a previously good credit profile.