Debt claim surge prompts credit warning

New statistics reveal business-to-business debt claims were 40% higher in July than the average for the same period over the previous six years, with experts urging start-ups to be wary of extending credit.

The statistics, released by National Credit Insurance (Brokers), show claims received in July 2011 were 40% higher than the average for the same period over 2004-10.

The electricity industry was the worst-performing sector, with 21 claims worth more than $2.4 million in July, while building and hardware recorded 20 claims worth more than $1 million.

The statistics come on the back of a Dun & Bradstreet report for the June quarter, which reveals almost two-thirds of Australian businesses took more than 30 days to settle their accounts.

The report also found the number of “severely delinquent payments” (90 days or more overdue) jumped almost 20% compared with the 2010 June quarter.

Rod Lamers, head of debtor finance at Oxford Funding, says there is no doubt that small businesses are doing it tough at the moment.

“Economic troubles in the US and Europe, soft consumer demand and a tougher ATO [stance]… has seen business confidence in Australia decline,” Lamers says.

Lamers says businesses need to account for bad debts in their forecasts, encouraging them to seek assistance.

“Talk to your business adviser or accountant about how you can improve your cashflow. Products such as debtor finance may help get your cash flow back on track,” he says.

Colin Porter, managing director of CreditorWatch, says businesses should be wary of extending credit, particularly if they’re a start-up.

“Too often, businesses are interested in the sale and they don’t stop to check whether a customer is a suitable debtor. Credit checks should be the number one defence against bad debts,” he says.

Those who deal with manufacturers should be particularly vigilant, with another new report revealing manufacturers are nearly five times more likely to be unable to pay their bills.

According to Dun & Bradstreet’s Dynamic Delinquency Score, the likelihood of severely delinquent payments in manufacturing increased by nearly 10% over the four months to June.

This compares with a rise of just over 2% in the non manufacturing sector.

“These figures do not bode well for the ongoing health of manufacturing in Australia,” Dun & Bradstreet chief executive Christine Christian says.

“While a strong Australian dollar is undoubtedly taking its toll on manufacturers, we need to remember that specific firm level risk is closely associated with business management fundamentals rather than just macroeconomic factors.”

“Almost exclusively, business failure is a result of poor credit risk and negative cashflow. These factors are the primary cause of insolvency and can occur at any time regardless of the outlook.”

Yet another survey reveals the increasingly serious nature of insolvencies in manufacturing and retail, both of which are tipped to undergo more company collapses.

The report, based on a survey by 333 Consulting and the Turnaround Management Association, reveals 92% of retail turnarounds this year involved closures or cutting down on products.

This compares to 75% in the previous year. The survey also shows that 75% of respondents believe the retail sector, along with manufacturing, will decline further during this financial year.

The survey analysed 110 turnarounds by interviewing professional advisers, executive management, board members, debt holders and equity holders involved in the businesses.

Mick Calder, executive director of 333 Consulting, says struggling businesses are no longer protected by government stimulus packages and relatively minor falls in discretionary spending.

“In 2011/12, there is no stimulus package or across-the-board growth strategy, and businesses are responding more aggressively and realistically,” Calder says.

“While this situation sounds dire, the fundamentals of sound business turnaround remain. Manage the business for cash in order to buy time to restructure or re-position, get the right advice and skills at the table, and address the whole-of-business issues in a logical sequence.”

“Ultimately, an exit strategy is generally part of this strategy, be it immediate or longer-term.”