Powered by MOMENTUM MEDIA
the adviser logo
Growth

Stimulus measures artificially boosting SMEs

by Malavika Santhebennur5 minute read
Stimulus measures artificially boosting SMEs

Policymakers should gradually ease stimulus measures for “zombie” SMEs to prevent a sharp spike in business closures, according to a credit reporting agency.

New data from digital credit reporting agency CreditorWatch has indicated that while the number of businesses entering administration has been at low levels since April 2020, many businesses may be being kept artificially afloat due to stimulus measures. 

To continue reading the rest of this article, create a free account
Already have an account? Sign in

CreditorWatch CEO Patrick Coghlan expressed concerns that this could mean that thousands of companies that would have ordinarily gone into administration have avoided doing so because of government stimulus measures, meaning that creditors and policymakers need to brace themselves for a sharp market readjustment when the government support ends.

He explained: “While at first glance, a decrease in business administrations, defaults and payment times seems to indicate green shoots appearing in our economy, we should be cautious.

Advertisement
Advertisement

“Payment times remain high, indicating significant cash flow issues, while the number of companies going into administration is far below the monthly average we would expect, telling us that many firms are being artificially propped up.”

The data indicated that there are some positive signs of stability in the SME sector, but these were insufficient to allay concerns about the overall health of the Australian economy.

According to CreditorWatch, the number of businesses defaulting on payments fell by 13.2 per cent in July and average days to payment decreased by 7.6 per cent across all sectors.

However, payment times have remained 224 per cent higher than July 2019 across all sectors, while the number of business administrations in July has simultaneously fallen by 11.6 per cent.

The industries that showed the greatest fall in payment times were:

  • Arts and recreation: Days overdue fell to 26 days overdue in July 2020 – down 34 days but still 160 per cent above July 2019;
  • Finance and insurance: Fell to 42 days overdue in July 2020 – down 33 days but still 500 per cent above July 2019;
  • Healthcare and social assistance: fell to 34 days overdue in July 2020 – down 18 days from June but still 209 per cent above July 2019; and
  • Construction: fell to 41 days overdue in June 2020 – down one day from June but still up 241 per cent compared with July 2019.

Mr Coghlan warned that while credit defaults and payment times could fall further, it would be “premature” to call these green shoots.

“Until now, the priority has been to keep as many businesses as possible above water,” he said.

“The extension of JobKeeper measures to March 2021 and the mooted extension of Safe Harbour measures, including high limits on the amount of debt that SMEs can incur while still trading, will keep SMEs afloat.

“However, the number of ‘zombie companies’ – those being kept out of administration artificially – continues to grow, and policymakers need to consider the gradual easing of measures to ensure good money is not being thrown away on bad companies, he said.

“Just as investors are watching listed companies closely during the reporting season to ensure they are not hiding behind government payments, creditors need to be keeping close tabs on SME market confidence and are working with debtors to build sustainable cash flow.”

The issue of payment times in the SME sector has been raised frequently in the past few months, with the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell calling on the government to create new laws to provide greater protections for SMEs against unfair payment practices.

Among the recommendations made in the ASBFEO’s final report from the supply chain finance, Ms Carnell called on government to legislate for mandatory standardised payment term of 30 days or less from receipt of invoices from small businesses.

[Related: Major bank calls for long-term SME reform]

Stimulus measures artificially boosting SMEs
money piggy
TheAdviser logo
money piggy

Malavika Santhebennur

Malavika Santhebennur

AUTHOR

Malavika Santhebennur is a content specialist at Momentum Media, focusing on mortgages and finance writing.

JOIN THE DISCUSSION

You need to be a member to post comments. Register for free today

MORE FROM THE ADVISER

matt comyn cba speaking ta bzhun1

CBA CEO acknowledges brokers following mortgage growth

The Commonwealth Bank of Australia (CBA) has released its results for the financial year ended 30 June 2022 and...

READ MORE
wif awards 2021 crowd ta giiu3m

Submissions open for Women in Finance Awards 2022

Hosted by Momentum Media, the Women in Finance Awards is returning for its sixth consecutive year to recognise the...

READ MORE
Cameron Poolman ta

OnDeck confirms origination surge following buyout

In early February, OnDeck Australia’s (OnDeck) executives and investors collectively purchased 80 per cent of the...

READ MORE
magazine
Read the latest issue of The Adviser magazine!
The Adviser is the number one magazine for Australia's finance and mortgage brokers. The publications delivers news, analysis, business intelligence, sales and marketing strategies, research and key target reports to an audience of professional mortgage and finance brokers
Read more