Business administrations surge, failure risk increases

According to the data, there was a 26 per cent increase on the number of external administrations over the year to November 2023.

While the food and beverage services sector; transport, postal and warehousing; and financial and insurance services were the three leading industries for administrations over the year, there have been some substantial increases in other sectors.

For example, the data revealed that public administration and safety and social assistance and healthcare sectors have both experienced a doubling of external administration rates in the last 12 months, at 101 per cent and 71 per cent, respectively.

Following closely was the construction industry, which encountered the third-largest surge (59 per cent increase) in external administrations over the year, due to persistent issues like project delays, cost overruns, labour shortages, and disruptions in the supply chain.

CreditorWatch chief executive Patrick Coghlan emphasised that the Business Risk Index data underscored the substantial strain experienced by nearly all sectors of the economy throughout the year.

“The fact that almost every sector has seen double-digit increases in the rates of business failures across 2023 is truly shocking,” he said.

“When this is viewed in the context of our other key business risk indicators, such as the steep decline in the average value of invoices and the rise in B2B payment defaults, it is shaping up to be a very challenging 2024 for Australian businesses.”

The report also disclosed a 34 per cent drop in the average value of invoices for Australian businesses over the past year, potentially attributable to the replacement of larger projects, notably in the construction sector, by smaller ones.

Additionally, reduced consumer demand is expected to cause a decrease in overall stock orders in the retail and wholesale trade.

Furthermore, credit inquiries have trended down as business activity and credit/loan applications declined, the data noted.

On the positive side, arts and recreation services was the only industry to see a drop in the rate of external administrations (-23 per cent) largely due to a normalisation of activity in the entertainment industry following the lockdowns.

However, CreditorWatch said it was “yet to be seen” if this positivity continues as cost-of-living pressures force consumers, particularly young renters, to reduce discretionary spending.

Not all doom and gloom

While healthcare has seen a surge in administrations recently, brokers have been working hard to protect the industry and provide finance where it is available.

Weng Wong, director at Equatorial Finance Solutions, noted no observable stress in the medico sector among his clients across Australia (Adelaide, Melbourne, Sydney, and Brisbane/Gold Coast).

He emphasised that his clients remain focused on standard activities such as home, investment, business loans, and equipment/asset finance.

“I believe this to also be because of how I operate in the sense of ensuring my clients only borrow what they need,” Mr Wong said.

“It is very easy for people to fall into the trap of thinking: ‘Banks will lend whatever to medicos at high LVRs so let’s gear up’ ... I have never operated like that.

“The ones that end up struggling are those that overcommit and we, as finance brokers, have a responsibility to ensure we are giving the right advice and guidance so that they do not do end up in that position.”

Broker guidance will continue to be important moving forward, with CreditorWatch’s national business failure rate prediction for the next 12 months increasing from the current rate of 4.18 per cent to 5.80 per cent.

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