The survival rate of unincorporated entities has declined since the third quarter of 2015, with the steepest drops experienced during the final three months of the past two calendar years.
These findings are outlined in the latest Small Business Risk Review, conducted by CreditorWatch. The credit reporting bureau reviewed registered payment defaults and trade payment data from over 40,000 members for its quarterly analysis.
The risk review revealed that payment defaults across Australia remained consistently high (+67%) during the final quarter of 2016. The review also produced the following table charting the cancellation rate of unincorporated entities (including sole traders, trust and partnerships) since December 2016 quarter:
| Q4
2014 |
Q1
2015 |
Q2
2015 |
Q3
2015 |
Q4
2015 |
Q1
2016 |
Q2
2016 |
Q3
2016 |
Q4
2016 |
| -35% | -31% | -6% | 38% | 51% | 35% | 36% | 20% | 47% |
Colin Porter, Managing Director of CreditorWatch spoke to Dynamic Business about the factors that drive the closure of unincorporated entities, noting the link between soaring payment defaults and a rise in closures.
“The high volume of payment defaults is a sign that many businesses are failing to repay their debts, and are more likely heading towards closure,” he said.
“SMEs, specifically sole traders, rely heavily on cashflow and when profits and revenue are reduced, they either stop paying or pay their suppliers slower. After this they would then be left with no option but to cease trading, close their doors or face insolvency that can lead to personal bankruptcy. Business is tough for SMEs and it’s more important than ever to perform regular credit checks and monitor a customer’s payment behaviour.”
Porter said the Risk Review also found that SMEs on average take longer to pay other SMEs (55.5 days) than they do to pay corporates (43.2).
“Corporates are generally classified as ‘critical suppliers’ due to the goods and services they provide,” he explained.
“Finance, landlord and telco providers are examples of critical suppliers which debtors depend on to run their business and therefore have to ensure they are paid on time. Corporates also have sufficient resources dedicated to credit management as opposed to a small business owner doing everything themselves.”
Porter said the closure of unincorporated entities (as evidenced by ABN cancellations) has often been an overlooked on the statistical front, with a greater focus given to the number of companies entering administration. The reason, he explained, is that unincorporated entities are not governed in the same way as companies by ASIC.
