A rise in overdue trade invoices and debt collection indicates business conditions are likely to deteriorate through 2023, according to research from credit bureau illion.
With financial stress from falling revenues and rising costs impacting business solvency, illion says business failure risk is trending higher, with little evidence of near-term relief.
However, two commercial finance brokers said the current high-risk market meant there was “substantial opportunity” for brokers to provide “great value” to their business clients.
“There’s still money-saving options available for businesses in today’s financial climate but you need to have a good grasp of what different lenders are offering,” said Daniel Green (pictured above left) director of Green Finance Group, winner of the La Trobe Financial Commercial Broker of the Year and the Westpac Australian Broker of the year at the Australian Mortgage Awards 2022. Green is also an excellence awardee (finalist) for the Commercial Broker of the Year at the 2023 AMAs.
With the rising cost-of-living and interest rates lifting prices across various everything from rent to materials, it’s little wonder that businesses are at risk of defaulting on their debts.
Illion data showed that many businesses in high-risk industries were more likely to be late on their trade payment obligations or at least be substantially overdue, with a considerable portion being behind by over 60 days.
On a national basis, the food services and construction industries showed the highest failure risk in Australia at 14% and 11% respectively, closely followed by the retail services and transport sectors, both at 10% risk of failure.
Barrett Hasseldine (pictured above centre), head of modelling at illion, said in both industries, high-risk businesses appeared to have “struggled for some time” but had also “deteriorated substantially” in the last six months.
“This trend in overdue payments suggests that the recent economic shock has had an especially significant impact on retail businesses, potentially resulting from falling revenues post-Christmas and rising input costs from shop rents, power prices, and inventory costs,” Hasseldine said.
Hasseldine said the recent rise in overdue trade payments could also be seen in vulnerable construction businesses, up from 29% in September 2022 to 42% in March 2023.
“This is likely to be attributed to the fall in cash flow from rising building supply costs and contract labour costs coinciding with fixed contracted project revenues.”
While the near future may seem dire for at-risk business owners, commercial brokers may offer a way through the difficulties and keep them afloat.
Anthony Arida (pictured above right), a commercial finance broker at Simplicity Loans & Advisory, said brokers could provide consumers with prospects out of these situations that might elude businesses operating without their insights.
“The commercial finance space has an array of products and solutions to aid businesses in overcoming prevalent issues such as cashflow constraints or limited access to funds,” Arida said.
“Among these solutions are facilities like factoring and invoice finance, equipment and asset-based lending, as well as working capital facilities, to mention a few.”
Green agreed, but said that the financial solution would depend on the individual business, current cash flows and industry predictions.
“If the business has existing debt, restructuring those loans by renegotiating terms or consolidating debt could provide temporary relief,” Green said.
“For some businesses, an overdraft facility, or an increase on existing facility to manage uneven cash flow during a seasonal or short-term downturn might be suitable. But it may not be the most cost-effective option to cover bigger expenses like an equipment purchase.
“For others reliant on business-to-business trade, debtor finance options that let you unlock the value of outstanding invoices, without additional property security, may be more suitable.”
At the other end of the scale, financial and insurance services, as well as professional and technical services (both at 3.5%) and wholesale trade and manufacturing (4%) have the lowest risk of business failure, according to illion.
Still, Aridas said in both favourable and challenging times, it was imperative for businesses to reevaluate their financial strategies, and seeking external financial assistance could offer substantial benefits.
“This adaptable approach enables them to navigate through shifts in market dynamics, optimise resources, and capitalise on growth opportunities while mitigating risk,” Aridas said.
“Within this framework, commercial finance brokers assume a crucial role by providing their specialised knowledge, personalised guidance, and access to a spectrum of financial products and lenders.”
With the home loan market becoming more and more competitive, some brokers are looking to diversify into commercial.
Both brokers said while the opportunity was there, experience was still the key – especially with the risk so high.
“There’s still money-saving options available for businesses in today’s financial climate but you need to have a good grasp of what different lenders are offering,” Green said. “Talking to an experienced broker with access to a choice of lenders and products and a proven track record in business finance is key.”
Aridas agreed: “Business owners need to align themselves with an informed individual who has a comprehensive understanding of which facility harmonises best with the business short-term and long-term goals.”
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