According to new data released on Friday by digital credit agency CreditorWatch, while 14 per cent fewer SMEs became insolvent in 2019 compared to 2018, there was a 30 per cent increase in payment defaults year-on-year, including a 15 per cent increase from Q4 2018 to Q4 2019, suggesting tough times ahead.
Drawing on annual and quarterly data from dozens of unique sources including ASIC, ABR, AFSA, courts and debt collectors, the CreditorWatch 2019 Small Business Risk Review shows a YoY increase in defaults across most industries from 2018–2019.
This includes transport by 64 per cent, healthcare by 79 per cent and real estate services by 61 per cent, indicating many SMEs are struggling to pay creditors.
“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,” said Patrick Coghlan, CEO of CreditorWatch.
“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.”
Defaults and court actions up across Australia
CreditorWatch also found that the number of court actions registered against small businesses increased YoY in all states, except Tasmania where a decrease of 35 per cent was seen.
South Australia led the pack with a 57 per cent rise from 2018–2019, followed by New South Wales at 39 per cent, Western Australia at 33 per cent and Victoria at 4 per cent.
As for payment times, the credit agency uncovered that despite a strong start to the year, a number of industries continue to be slow paying, with admin and support services taking up to 90 days in the last quarter of 2019.
“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,” Mr Coghlan opined.
He concluded: “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.”