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SME activity hits 7-year low amid payment defaults

The August CreditorWatch Business Risk Index (BRI) unveiled a challenging business landscape for SMEs in Australia.

The most concerning development was the significant decline in the average value of Business-to-Business (B2B) invoices, which nosedived by 36% year-on-year, hitting its lowest point since January 2017.

These findings highlight a challenging landscape for Australian businesses. They are currently facing a dual challenge of decreasing orders and mounting cost pressures, all amid a backdrop of shrinking consumer demand. This combination is cascading through the supply chain, causing a dip in order values and impacting overall revenue. Furthermore, key indicators such as a 28% year-on-year increase in external administrations, the highest since October 2015, and a 30% year-on-year rise in trade payment defaults, are signaling the hurdles that businesses are navigating. While credit enquiries surged by 65% year-on-year, they have recently trended downwards, reflecting a decline in overall business activity. Court actions are on the rise, though still below pre-COVID levels. 

Furthermore, the national business failure rate is predicted to escalate from the current 4.54% to 5.76% over the next year, reflecting the tough economic climate. Notably, businesses in the food and beverage sector face the highest risk of payment defaults at 7%, followed by the transport and warehousing industry at 4.5%. The construction sector has experienced a consistent upward trend in external administrations since May 2021, surpassing pre-COVID levels. 

SME activity hits 7-year low amid payment defaults

Despite these challenges, specific regions in South Australia, such as Norwood-Payneham-St Peters, Ballarat in Victoria, and Unley in South Australia, exhibit lower business failure risks. Conversely, regions with higher insolvency risks are concentrated around Western Sydney and South-East Queensland, with Merrylands-Guildford in NSW forecasted to experience a default rate of 7.77% in the near future, followed by Canterbury and Bankstown, also in Western Sydney. The decline in invoice values reflects the ongoing economic challenges experienced by Australian SMEs. Cost pressures and a decrease in consumer demand have translated into fewer orders, affecting revenue across the supply chain. Additionally, various critical business indicators, including external administrations, trade payment defaults, credit inquiries, and court actions, further underscore the growing challenges that SMEs are confronting.

  1. Rise in External Administrations: External administrations have surged by 28% year-on-year, reaching their highest point since October 2015.
  2. Trade Payment Defaults Spike: Trade payment defaults, often serving as early warnings of business failure, have witnessed a 30% year-on-year increase.
  3. Surge in Credit Inquiries: Credit inquiries have soared by an astounding 65% year-on-year, though recent trends indicate a decline, mirroring the broader decrease in business activity.
  4. Increasing Court Actions: Court actions have been on the rise, although they are yet to reach pre-COVID levels.
  5. Projected Business Failure Rate: CreditorWatch’s forecast for the national business failure rate over the next 12 months anticipates an increase from the current rate of 4.54% to 5.76%, signifying a challenging path ahead for SMEs.

Challenges Across Industries:

  • Food and Beverage Services: This sector faces the highest risk of payment defaults at 7.0%, primarily due to high operating costs and declining discretionary spending.
  • Transport, Postal, and Warehousing: The transport sector closely follows with a 4.5% risk of payment defaults. The slowdown in online shopping growth has impacted this industry.
  • Construction: Rates of external administration in the construction sector now exceed pre-COVID levels, underlining the ongoing challenges faced by this industry.

Regional Variances:

  • South Australia has exhibited pockets of resilience, with three of the six lowest-risk areas in the nation located within the state.
  • Norwood-Payneham-St Peters in inner Adelaide stands out as the lowest-ranked region in Australia for business failures.
  • In contrast, areas with the highest insolvency risk continue to cluster around Western Sydney and South-East Queensland.

Declining invoice values amidst economic challenges

Despite the demanding conditions imposed by lockdowns, Australian consumers exhibited robust per capita spending during the 2020 and early 2021 period. A surge in construction and renovation activities led to elevated average invoice values during this time. However, as the construction and retail sectors experience a significant slowdown, the average invoice sizes are on a decline. This trend serves as an indicator that unemployment may rise in the coming period, as many businesses are scaling down their need for additional labor.

Increasing B2B trade payment defaults

CreditorWatch’s Trade Payments Default Index highlights an alarming trend of businesses lodging defaults against their debtors at record rates. Anneke Thompson, a noted expert, observes that as the average invoice sizes decrease, it is logical to expect a reduction in cash flow among a growing number of businesses. This, in turn, results in more instances of late payment of invoices. Unfortunately, this situation has a cascading effect, as businesses experiencing delayed payments are at a heightened risk of becoming late payers themselves. Recent data from the past few months confirms that this cycle is already in motion.

CreditorWatch CEO, Patrick Coghlan, says the impact of contractionary monetary policy and inflation on consumers, is clearly being felt by businesses.

“Twelve rate rises in just over a year was always going to have a major effect on consumer sentiment and force people to tighten their belts, having a particularly big impact on those businesses exposed to discretionary spending,” he says. “I’m very sorry to say that we’re far from the peak of business failures.”

CreditorWatch Chief Economist, Anneke Thompson, says the good news is that monetary policy tightening has worked to slow consumer and business spending.

“This, in turn, is driving inflation down,” she says. “The unfortunate reality is that this will also result in business failures, particularly for those businesses that were already only marginally profitable when interest rate settings were low.”

Despite the challenges posed by lockdowns, the decline in the average size of invoices is a growing concern. As the construction and retail sectors experience significant slowdowns, the demand for additional labor diminishes, potentially leading to higher unemployment.

The increase in trade payment defaults can be attributed to reduced cash flow among SMEs. Late payments create a ripple effect, as businesses receiving late payments may also struggle to meet their own financial obligations.

As SMEs fall further behind in payments, coupled with declining consumer and business activity, CreditorWatch anticipates a significant uptick in business failures over the next year. The Australian Tax Office’s stricter approach to collecting overdue GST payments exacerbates the pressure on SMEs’ cash flow.

With interest rates expected to remain at current settings until at least mid-2024, consumers are likely to continue curtailing their spending as a larger portion of their income goes toward interest payments and rent. This scenario is poised to drive business failure rates even higher, especially in regions with highly leveraged households or those grappling with high rents relative to incomes.

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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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