SME invoice payment defaults at record high: CreditorWatch

Compared to CreditorWatch’s previous payment default index, this is the highest index measure in the past three years.

However, the average value of invoices was at a record low last month, at under $150,000, according to CreditorWatch.

While there has been a slight seasonal increase in the average value of invoices in February, CreditorWatch attributed the rise to a seasonal adjustment after January (when most Australians are on holiday).

The chief executive of CreditorWatch, Patrick Coghlan, said that the increase in business-to-business payment defaults and decreasing invoice values were a “concerning combination”.

Coghlan said: “Trade payment defaults going up while invoice values decline is a real worry. This indicates that cash reserves are being depleted and margins are being squeezed.

“An increasing number of businesses have less cash coming in, which means they are then finding it more difficult to pay their own suppliers and as such we are seeing a steep increase in payment defaults being registered on the CreditorWatch database.

“They are also cutting the size of their orders and running down inventories.

“This payment defaults data provides our members with critically important intelligence about the trading behaviour of other businesses, some of whom they could have extended credit to.”

The research found that there was a strong correlation between business failures and payment defaults, with a 24 per cent chance of businesses becoming insolvent in the 12 months after their first default.

This likelihood increases for a business with two defaults against two businesses with a 42 per cent chance of becoming insolvent.

Speaking with The Adviser, finance broker Jenaya Huxter from Ausloans Finance in Strathalbyn, South Australia, said that while she had not specifically seen SMEs defaulting on invoices, she did note that businesses were “struggling”.

Finance broker James Kelder from Green Finance Group said that he has also been noticing an increase in tension around business cash flow.

He commented: "Creditors are offering shorter terms, debtors are looking for longer terms. While it’s not a new trend, it’s more pronounced or specific to particular industries – hospitality and construction come to mind."

When asked about what support brokers can provide SMEs at risk of missing invoice payments, Huxter stated: “We like to help educate the market, keep in touch with our audience, and try to take a proactive approach.

“It’s really important for companies and individuals alike, to take charge, and manage their debt before they reach a point of falling behind or being unable to catch up.

“This is important as then we have options while they are in a good financial position to navigate, consolidate, or help to mitigate debt and opportunities.”

Kelder told The Adviser that he takes a "wholistic" approach to supporting businesses.

He continued: "I need to understand the business, cycle changes, and key metrics for success. Interestingly not all clients can articulate this, so it takes some background work and usually involves additional professionals in the form of accountants or business advisors.

"Once I have a full picture I can establish a working capital solution to suit, whether it’s an overdraft or debtor and trade finance. Sometimes, it just comes down to negotiating better terms with the client’s existing lender."

Huxter said to The Adviser that non-bank lenders specialising in SME finance included Dynamoney, which she said was a “standout” as they have a wide range of options from “asset, cash flow to overdraft facilities”.

She also gave a shoutout to Bizcap, which supports clients in a “lesser financial position” and that the lender is a good example of being able to “extend products and options” to those in need of more assistance.

Kelder said that NAB are his first point of call. He also said that non-banks such as Money Tech and Scotpac offer "more flexible terms" regarding gearing and timing of repayments.

He said: "Of course, higher costs are a factor here, but it always comes back down to the complete package and my team and I do make it a priority to keep on top of new or revised products coming to market in this space."

ScotPac, has also broadened out their solutions to SMEs, with the non-bank launching a new line of credit this week.

[Related: Dynamoney launches overdraft credit card for SMEs]