Watching for the collapse wave

This week’s hearings at the Senate inquiry into SME access to finance have heard some worrying statements from banks about the prospect of an increase in SME company collapses in the coming months.

With the economy recovering, banks are starting to become more confident about selling off the assets of businesses that they have helped nurse through the downturn.

Representatives from Westpac, Commonwealth and the Australian Bankers’ Association basically told the inquiry that as the patience of banker runs out, the number of insolvencies is likely to increase.

The idea of waves of collapses during a downturn is a popular one in banking sectors. First the big corporate collapses come, then the medium sized companies, followed by the small businesses and finally the consumers.

We certainly had the first wave and we’ve seen some signs of trouble in the medium sector, but the widespread trouble in the small end just hasn’t happened.

As we’ve seen at the hearings, there are plenty into the banking sector who believe more SME insolvencies are one the way.

There are plenty of in the turnaround and insolvency sector who agree, and also point out that the Australian Taxation Office – which has been extremely generous with helping SMEs get some mercy on their tax debts – might also start calling in their debts too.

The theories make sense, but from my discussions with insolvency professionals in the last two weeks, what is happening on the ground is very different.

“I keep hearing about this GFC, but it didn’t happen for me,” says one corporate undertaker, who has been waiting in vain for the small business “wave” to crash.

Other insolvency veterans variously describe the level of work from SMEs as erratic, quiet or dead.

So is the wave actually coming? And if it does, will it be a tsunami or a gentle breaker?

Certainly the banks are going to start becoming more aggressive with their troublesome clients, and it appears their restructuring teams remain hard at work behind the scenes.

This will result in an increase in insolvencies, but the experts are starting to think it might not be as big as expected.

As the economy recovers, we might find that these recovery teams are in a better position to help struggling clients trade out of trouble, rather than putting them into administration or receivership.

The wild card is the tax office. If the tax man starts calling in debts and putting the pressure on directors to pay up, then we could see the beginnings of a wave.

But perhaps that change of tactics from the ATO might be some way off. As one insolvency expert suggested, the tax office is probably unlikely to get very aggressive in the lead up to a Federal election.

That means a big debt collection push might be delayed until next year, by which time it looks like the economy will be really humming.