Wed Aug 12

CreditorWatch: Signs of small business recovery but economy remains in unchartered waters

Written by CreditorWatch

New data from leading digital credit agency CreditorWatch reveals some positive signs of stability in the small business sector, but not enough to allay concerns about the overall health of the Australian economy. Compared with June 2020, the number of businesses defaulting on payments fell by 13.2 percent in July and average days to payment decreased by 7.6 percent across all sectors. Credit enquiries being made on CreditorWatch’s platform, a live barometer for business activity, also increased by an average of 5.1 percent in July from June.

The industries that showed the greatest fall in payment times were:

Arts and recreation fell to 26 days overdue in July 2020 - down 34 days but still 160% above July 2019
Finance and insurance fell to 42 days overdue in July 2020 - down 33 days but still 500% above July 2019
Healthcare and social assistance fell to 34 days overdue in July 2020 – down 18 days from June but still 209% above July 2019
Construction fell to 41 days overdue in June 2020 – down one day from June but still up 241% compared to July 2019

However, payment times remain 224 percent higher than July 2019, across all sectors, and an 11.6 percent fall in the number of business administrations in July. This continues an historic run of low administration rates, beginning in April, which means that thousands of companies that would have ordinarily gone into administration have avoided doing so, thanks to government measures. Creditors and policy makers therefore need to prepare for a sharp market re-adjustment when government support ends.

Patrick Coghlan, CEO of CreditorWatch, said “While at first glance, a decrease in business administrations, defaults and payment times seems to indicate green shoots appearing in our economy, we should be cautious. Payment times remain high, indicating significant cash flow issues, whilst the number of companies going into administration is far below the monthly average we would expect, telling us that many firms are being artificially propped up.”

According to Coghlan: “Until now, the priority has been to keep as many businesses as possible above water. The extension of JobKeeper measures to March 2021 and the mooted extension of Safe Harbour measures, including high limits on the amount of debt that SMEs can incur whilst still trading, will keep SMEs afloat. We may even see further falls in credit defaults and payment times but it would be premature to call these green shoots.”

“However, the number of ‘zombie companies’ - those being kept out of administration artificially - continues to grow and policy makers need to consider the gradual easing of measures to ensure good money is not being thrown away on bad companies. Just as investors are watching listed companies closely during the reporting season to ensure they are not hiding behind government payments, creditors need to be keeping close tabs on SME market confidence and are working with debtors to build sustainable cash flow.”