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Growth in ‘zombie’ businesses heightening risk of insolvency wave

Adrian Flores
Adrian Flores
09 September 2020 2 minute readShare
heightening risk of insolvency wave

The recent extension of safe harbour measures preventing small-business insolvencies to December is leading to concerns of a wave of insolvencies in 2021.

According to new data from CreditorWatch, business administrations fell by 37.1 per cent from July to August and are 59 per cent lower than the average across 2019.

The digital credit agency interpreted the finding by noting that thousands of Australian businesses are now relying on government support to stay afloat.

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By state, CreditorWatch’s Small Business Risk Review data for August 2020 found Victoria business administrations fell by 49.3 per cent in August, while New South Wales recorded a 34.3 per cent decrease in business administrations, following an 8.8 per cent decrease in July.

In Queensland, there was a 25.4 per cent decrease in external administrations in August, off the back of a 38.8 per cent decrease in July.

 

But with some sectors showing strong resilience, and credit enquiries showing consistent month-on-month increases, CreditorWatch has called for the recent insolvency relief measures to be eased off now to prevent a tsunami of insolvencies in January 2021. 

“While safe harbour legislation was critical in stabilising the Australian economy as it went into recession, the measures are now becoming counterproductive because they are propping up companies that should be allowed to fail,” said CreditorWatch chief executive Patrick Coghlan.

“By extending the moratorium to December, the government is wasting taxpayer money by kicking the can down the road. It means that solvent businesses are having to trade with otherwise insolvent debtors, risking their own health, while doomed businesses are able to put off paying creditors or even the ATO.

“In fact, some business sectors are performing well. The ‘Made in Australia’ brand is flourishing and there are healthy companies out there. That’s why this legislation needs to be eased off gradually running up to the December deadline. Otherwise, we could see an astonishing collapse come January.”

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Payment times data reveal SME cash-flow struggles

As for payment times, CreditorWatch found that remained extremely high. Nationally, payment times grew by one day (2.4 per cent) to an average of 43 days, meaning businesses are waiting 2.9 times longer to be paid than in 2019.

 

 

 

Source: CreditorWatch

CreditorWatch chief economist Harley Dale said that with payment times staying stubbornly high, it’s clear that the SME sector is struggling to generate cash flow outside of government support, indicating that there is a mountain of trouble behind the curtain of stability.

“It sounds harsh, but these businesses need to be allowed to fail so that government focus can be aimed at companies that can stand on their own two feet,” Mr Dale said.

“This is a much bigger cog in the wheel of Australia’s economy than policymakers realise. Winding back safe harbour measures, while ensuring borderline companies receive the assistance required from restructuring bodies, is crucial to ensuring Australia passes through the next ‘economic gate’ without taking a massive blow at the beginning of 2021.”

Growth in ‘zombie’ businesses heightening risk of insolvency wave
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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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