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Local Debt Recovery

Industries most at risk of insolvency. Don’t get caught short.

While the small business community throughout Australia is recovering from the economic fallout of the COVID-19 crisis, there are certain industries that remain at significant risk of insolvency.

CreditorWatch’s monthly Business Risk Index for October 2021 shows that the likelihood of a businesses defaulting on payments is at 5.78%, very slightly up from the September period. The default rates are generally closely connected with business failure and insolvency.

The potential for businesses in the food and beverage industry to default is somewhat higher than the national average at 5.97%, closely followed by the arts and recreational services (4.03%), and the education and training sector (3.99%).

Hospitality businesses on the Gold Coast are considered the most at risk of insolvency, given that the sector is almost entirely driven by tourism – an area that has been hardest hit during the COVID-19 crisis.

At present, the construction industry is rated worst for overdue payments to suppliers. It’s an industry that has been hit hard by lockdowns in NSW and Victoria, but also a global shortage of materials has created never before seen delays in completing even the most straight forward projects, both in the consumer and commercial markets. Right now, the construction sector is showing overdue payments at record highs of 12.6%.

The transport sector is not far behind building and construction for late payments, at 11.1% – with postal and warehousing-related businesses at 10.7%.

We have noticed a shift in the way credit reporting agencies are “scoring” businesses in the sectors mentioned above; the algorithms that score a credit report seem to be increasing the risk-rating to those sectors when there is no other reasons apparent for a reduction in their score when reviewing the credit data in the report.

What are creditors doing with their delinquent clients ?

Insolvency rates have been trending downward since the start of the pandemic, and there will come a point soon when the momentum will shift.

Insolvencies have been held off by record levels of government support, including the suppression of payments and payment holidays from landlords and banks. In addition, the ATO has taken a very lenient approach to overdue tax debt, and a number of legislative changes have given “safe harbour” to businesses that have prevented creditors from taking wind-up action. With a fall of 4.00% in company insolvencies for October 2021 compared with the same period last year, it seems that the trend to not take action may now be bottoming out.

We didn’t see the forecast “tsunami of insolvencies” in 2021, but the latitude shown by suppliers, financiers, banks and other trading partners will come to an end. While no-one seems to have been able to accurately forecast much at all during the pandemic, there’s a growing consensus that the early part of 2022 will see an increase in defaults and a reversal in the trends of the past 18 months.

What do I need to do ?

As a general rule, the Christmas period (extending into January and February) sees a slowdown in payments – the “cash flow crunch” usually hits hardest during that period.

If you have customers that are now significantly outside your trading terms, or who you have extended lenience to out of sheer generosity, then now is the time to act. Notify those customers that you require payment without further delay.

That old saying “it isn’t a sale until it’s paid for” has never been more true, so don’t put your own business at risk out of loyalty or generosity – and remember that we are here to help you any time with all things debt recovery and debtor management.