The latest CreditorWatch Business Risk Index (BRI) for June 2023 has revealed a concerning reality – B2B trade payment defaults have reached an unprecedented level.
This indicates that businesses are at risk of collapsing, with insolvency rates likely to rise in the coming months.
According to the June 2023 CreditorWatch BRI, B2B trade payment defaults have reached a record high, suggesting that businesses are facing increasing stress and the rates of insolvencies are expected to rise in the near future.
The data from CreditorWatch’s payment defaults reveals that businesses with a single trading partner lodging a payment default against them have a 26 per cent chance of insolvency within the next 12 months. This percentage increases to 45 per cent for businesses with payment defaults lodged by two trading partners and jumps to 65 per cent for defaults lodged by three or more trading partners.
Furthermore, other leading business indicators such as credit enquiries, court actions, and external administrations also reflect a deterioration in business conditions.
On a positive note, the Business Risk Index data for the past 12 months highlights that the three biggest improving regions are all located in Western Brisbane: The Gap-Enoggera, Brisbane Inner-West, and Kenmore-Brookfield-Moggill. These regions boast below-average rental and property costs, above-average incomes, low personal insolvency rates, and score highly on the ABS indexes of social advantage and economic opportunity.
Key insights from the June Business Risk Index include:
- B2B trade payment defaults reached a record high of 1,586 in June, marking a 52 per cent year-over-year increase. This surpasses the previous high observed in March 2019.
- Credit enquiries have surged by 161 per cent year-over-year as businesses tighten their due diligence processes and credit policies.
- While external administrations dipped slightly from May to June, they are still up by 13 per cent year-over-year and continue to show an overall upward trend.
- Court actions are also on the rise, although they have not yet returned to pre-COVID levels.
- CreditorWatch predicts that the national default rate will increase from the current rate of 4.71 per cent to 5.76 per cent over the next 12 months.
- The Food and Beverage Services industry remains at the highest risk of default due to declining discretionary spending and ongoing challenges such as labor shortages. It is closely followed by the Transport, Postal, and Warehousing sector.
- The construction industry is experiencing an increase in external administrations, reaching its highest point since April 2020.
- In terms of regional insolvency risk, the Unley region in South Australia has the lowest risk among regions with more than 5,000 businesses, followed by Norwood-Payneham-St Peters (SA) and Yarra Ranges (VIC).
Regions with the highest insolvency risk are predominantly clustered around Western Sydney and South-East Queensland, with Merrylands-Guildford (NSW) forecasting a default rate of 7.80 per cent for the same period next year.
The record rate of B2B trade defaults suggests that businesses are tightening their cash flow processes. With high interest rates and inflation, business owners in FY2024 are expected to have little tolerance for late payments, leading to elevated trade payment defaults.
Given that B2B trade defaults serve as strong indicators of future insolvencies, CreditorWatch’s default rate predictions continue to rise. Businesses are now feeling the impact of consumer pain, particularly in the construction sector, where high input costs and low dwelling approvals contribute to a depressed demand outlook. Retailers and the food and beverage sector also face a gloomy outlook for discretionary spending, particularly as more home loans transition from fixed rates.
When considering the best and worst regions and capital cities in terms of business insolvency risk (among regions with over 5,000 businesses), areas with older median ages tend to present lower risk due to lower debt levels and established income streams. Conversely, regions with higher risk tend to have younger populations and business profiles heavily reliant on construction, tourism, and retail trade.
CreditorWatch CEO, Patrick Coghlan, says the RBA’s 12 consecutive interest rate rises to a current 4.10% are beginning to squeeze small businesses and consumers alike. “The impact of the rate rises, as well as high inflation, is increasingly being felt by businesses as consumers tighten their belts. Forward orders are going down as demand falls away, and both business and consumer sentiment is in rapid decline.
“Thankfully, many businesses emerged leaner and more efficient in the wake of the pandemic after trimming fat and investing in technology, which bodes well for the tough conditions now and in the months ahead.”
CreditorWatch Chief Economist, Anneke Thompson, says the pause in monetary policy tightening, while welcome for business owners, is only expected to be temporary. “Inflation is still too high, evidence from overseas also tells us that core inflation is proving ‘sticky’, and labour markets are still too tight,” she says. “The RBA has succeeded in slowing consumer spending for goods and reducing inflation in this area, however, consumers alone can’t bring down inflation.
“A slowdown in business investment and hiring is now needed to further drive inflation down. For this reason, the RBA will be closely monitoring job vacancy and labour force data for signs that their policy intervention is flowing through to the business side. Our June BRI data strongly suggests that businesses are absolutely tightening their belts.”
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