Less than 20% of small firms conduct credit checks: Report

More than 80% of small business decision-makers have experienced cashflow issues in the past year, according to a new survey, but only 17% conduct credit checks on new customers.

The findings, which come from the latest Bibby Barometer Small Business Survey, reflect the views of 208 Australian small business owners, excluding retail businesses.

For the purpose of the study, small businesses are classified as those with between five and 19 employees.

According to the survey, almost half (49%) of small business decision-makers are experiencing more difficult cashflow circumstances, compared to 43% six months ago.

The survey shows 83% of business decision-makers have experienced cashflow issues in the past year, most commonly because customers make excuses for slow payments (41%).

Almost a quarter (23%) of small business owners have had to write off a bad debt over the past 12 months, while 21% have had difficulty meeting tax payments on time.

Despite the risk of bad debt, only 17% of the business owners surveyed conduct credit checks on new customers.

Meanwhile, almost 40% have been spending more time chasing invoices over the past year, and some have resorted to delaying payments to their own suppliers (21%).

Others have refused to take on more work until invoices are paid (21%) or have simply taken out or increased their overdraft to meet liabilities (21%).

A key contributing factor to business owners’ cashflow woes is the length of time small businesses must wait to be paid – 52% experience delays compared with 12 months ago.

More than a third (36%) report having an invoice that was months overdue in the past year, while 32% have had customers negotiate to pay in monthly instalments.

A total of 25% have had a customer go bust altogether, while 23% have had their clients increase their terms of trade so they have to wait longer to be paid.

Alarmingly, more than three quarters (77%) of respondents are concerned about clients or customers becoming insolvent in the coming year, while a quarter are very concerned.

According to Gary Green, director of Bibby Financial Services Australia, some businesses are putting in place “advance warning systems”, including cashflow forecasts (27%).

Meanwhile, 19% are undertaking periodic cashflow “health checks” with their accountants or advisers.

“We would like to see all SMEs using forecasts or cashflow checks to warn of danger ahead,” Green says.

“Only 17% of companies are doing credit checks on new customers, which is a concern. Credit checks are an inexpensive way of reducing the chance of bad debts.”

The survey comes on the back of a report by ME Bank, which shows despite the higher pace of savings in Australia, more than half of households are cash-strapped at the end of the month.

The report, which is based on a survey of about 1,500 homes, shows 43% of households are able to “make ends meet” but are unable to save.

Meanwhile, 10% are getting further into debt – drawing on savings, loans, credit or equity in their home – suggesting credit checks on new customers are now more important than ever.