BREAKING BACKBONE: Small business insolvencies jump

Small business insolvencies have risen 20% over the last quarter, an increase of 8% year-on-year in an ominous sign for the Australian economy, with CreditorWatch CEO Patrick Coghlan saying the latest data is “the canary in the coal mine”.

Coghlan suggests the rise in businesses being declared insolvent doesn’t bode well for the economy. Coghlan’s comments follow the release of the Small Business Risk Report, which draws data from 26 unique sources including ASIC, ABR, AFSA, courts and debt collectors.

He believes the report’s findings suggest the economy is likely to slow further with court actions (brought by creditors when debtors default) increasing by 21% over the last three months, and 8.8%  year-on-year.

Payment defaults registered on CreditorWatch’s platform also rose 13% year-on-year. Coghlan says both these figures suggest further small business insolvencies are likely.

“An increase in court actions should be viewed as a canary in a coal mine for the Australian economy since SME insolvencies are likely to increase on top of the growth we saw in Q3,” he said.

“Small businesses are the backbone of the Australian economy, so further payment defaults mean trouble for millions of working people and without the certainty of being paid by debtors, companies are unable to make investments in new people, equipment or facilities to fuel their growth.”

The future looks particularly bleak for NSW small business owners with a 63% increase in court actions in the last quarter. Victoria has fared best with creditors taking court action down 2% in the last quarter – although it is worth noting this follows a year of increased court action including a record number of court actions in Q2 2019.

“All the signs suggest we should be preparing for further economic slowdown,” says Coghlan.

The report reveals some industries are faring worse than others, with the construction sector; companies within professional, scientific and technical services; retail; manufacturing and wholesale trade showing the highest number of court actions.

Coghlan suggests slow payment times are exacerbating the financial stress of small business owners, with average days to payment across all industries now sitting at 57 days. Small businesses everywhere are struggling to meet payment deadlines.

“With companies looking to lengthen their payment terms, at the same time pushing debtors to pay faster, businesses should be taking this time to review their due diligence processes, check their terms and cash flow, and invest in the necessary technology and advice,” advises Coghlan.

“One default can have a big impact on a small business and so it’s crucial that Australian SMEs take advantage of all avenues of preventative analysis available to them.”