Business payment defaults ‘surge to record high’ in June
Businesses are under increased stress with the rate of insolvencies expected to rise further in the months ahead, a credit ratings agency warns.
The latest CreditorWatch Business Risk Index has revealed that business to business payment defaults have jumped 52 per cent year on year, climbing to a new record high.
The record rate of B2B trade defaults suggest that businesses are significantly tightening up their cash flow processes.
CreditorWatch said the end of the financial year is typically when all business owners evaluate their cash flow processes, forward orders, revenue, cost projections and existing customer payment patterns.
“The environment of high interest rates and inflation means that in FY2024, business owners will, by necessity, have very little patience for late payments and, for this reason, we expect trade payment defaults to remain elevated,” the credit ratings agency said.
Credit enquiries have also continued to surge as businesses increase their due diligence processes and credit policies.
CreditorWatch chief executive Patrick Coghlan said the rapid rise in interest rates up to 4.10 per cent is starting to squeeze small businesses and consumers.
“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,” said Mr Coghlan.
Mr Coghlan said that fortunately many businesses emerged leaner and more efficient in the wake of the pandemic after trimming fat and investing in technology.
“This bodes well for the tough conditions now and in the months ahead,” he said.
Rising default rates a sign of things to come
CreditorWatch is predicting the rate of insolvencies to rise further given that B2B trade default are typically a strong indicator of future insolvencies.
“We now appear to be at the point of the cycle where consumer pain is being felt by businesses,” it said.
The food and beverage sector is the sector with the highest probability of default over the next 12 months at 7.06 per cent.
Based on the latest insolvency statistics released by ASIC yesterday, there were 1,278 insolvencies in the accommodation and food services sector during the 2022–23 financial year based on data at 25 June 2023. This was a 56 per cent increase from the previous financial year.
“For retailers and the food and beverage sector, the outlook for discretionary spending appears very depressed, particularly as more home loans move off fixed rates,” said CreditorWatch.
Although the sector is coming off a period of very high demand, this has been countered by rising food, electricity, debt and labour costs.
“Demand is likely to fall in the coming months, while input costs are still rising, presenting very challenging conditions for café and restaurant owners,” the credit agency said.
The construction sector recorded the highest number of insolvencies with 2,750 firms entering external administration or having a controller appointed, based on the ASIC statistics as at 25 June.
“The construction sector is still dealing with high input costs that are, in many cases, wiping out any profit margin on projects, and it now has the added challenge of very low dwelling approvals, resulting in a depressed demand outlook,” CreditorWatch said in its report.
Outlook for the next 12 months
The beginning of the new financial year is likely to bring increasing pessimism among Australian business owners, according to CreditorWatch, particularly those reliant on discretionary spending.
“While labour force data is still very strong, it is likely we will start to see a slow rise in the unemployment rate, as businesses prepare for weaker conditions over the next 12 months,” it said.
CreditorWatch chief economist Anneke Thompson said while the pause in monetary policy tightening was welcome for business owners, it is likely to only 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 said.
“The RBA has succeeded in slowing consumer spending for goods and reducing inflation in this area, however, consumers alone can't bring down inflation.”
Ms Thompson said 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,” she said.
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