Perfect storm of economic headwinds signal turbulent summer ahead for small businesses

Many small businesses across Australia could be pushed to the brink of default over the next 12 months, with rising interest rates, increasing credit, winding-up applications and court recoveries by the ATO all key indicators of challenging times for the SME sector.

Recent data from Australian commercial credit reporting bureau CreditorWatch found that the risk of default for small businesses over the next 12 months has increased in all regions across Australia.

According to the bureau’s October economic monthly update, both the release of the 022-23 federal budget and September quarter inflation point to far more difficult economic conditions for Australian businesses in 2023.

CreditorWatch chief economist Anneke Thompson says it could mean a significant slowdown for the Australian economy.

“Overall, both the Australian and global economies appear to be teetering at an inflection point, where all signs are pointing to a significant slowdown in economic growth in 2023, and continued higher prices will make life very tough for businesses and consumers,” she said.

The September 2022 CreditorWatch Business Risk Index (BRI) revealed that over the next 12 months the risk of default would increase across Australia with 5000 or more registered businesses that are currently battling labour shortages, rising inflation, interest rate rises and supply chain issues.

CreditorWatch CEO Patrick Coghlan says B2B trade payment defaults showed a dip in September, however, these remain well above levels seen in September last year during COVID-19 restrictions, and are a lead indicator of future defaults.

“Payment defaults are hugely significant and are a key indicator of coming delinquency for the debtor/customer.

“Approximately 25% of businesses that default end up in administration within 12 months. Additionally, it puts pressure on the supplier who will now have to shoulder that bad debt. A business with a trade payment default are seven times the default risk compared to a business with a clean payment record,” he said.

According to Alares’ monthly credit risk insights, there was a drop in the total number of insolvencies in October, marking the first month since May that insolvencies were materially below pre-pandemic levels.

The report also shines a spotlight on a number of key risk indicators, including winding up applications, ATO and big four bank court recoveries, that continue to trend upwards.

The latest quarterly commercial insights by global data, analytics and technology company, Equifax reveals business credit demand has increased in the September quarter, returning to growth following a dip in Q2 and led by a 5.2% increase in asset finance applications

Equifax general manager of commercial and property services Scott Mason says industry-specific trends that reflect the changing business conditions year-on-year were also in play.

“For example, demand for trade credit in the accommodation and food services industry increased 14% this quarter. This suggests these businesses, which were some of the hardest hit during COVID-19, are taking on credit to rebuild or shore up their operations ahead of the upcoming Christmas period,” he said.