Record level of consumer debt a warning to SMEs

Consumer debt increased to record highs during the June quarter, new data from Dun & Bradstreet reveals, but businesses are ignoring the warning signs and are allowing these debts to impact their cashflow.

The figures show the average value of referred debts is now at its highest level in over four years and reached over $1,000, representing a 25% increase from 2009.

But D&B corporate affairs manager Damian Karmelich also points out the data shows clear links between low-value debts and high-value debts, meaning consumers defaulting on lower value debts are more likely to default on more big-ticket purchases.

“This data is a warning sign to businesses for perspective creditors. They need to be conducting due diligence on who they may be lending money to. They may say that someone has defaulted recently, but it’s a small debt and they try to discount it.”

“But this data shows there is a clear link between low and high value debts. This affects their cashflow, and ends up creating some real issues in the business.”

The data points out that referred debts are “traditionally the first sign an individual is facing financial trouble”. It found that consumers with accounts in default, (60+ days overdue), are more likely to face other credit struggles.

An individual with a utilities debt over 60+ days overdue is 650% more likely to default on other credit, while defaults for telco bills indicate a 450% chance of other credit defaults. The research also found businesses are at considerable risk because of these smaller debts, with the average time between a first and second default just 10 months.

Karmelich says many businesses are ignoring these smaller debts, but points out the value of negative credit events have no significant correlation to a consumer recording multiple defaults.

“If you’re going to lend money to somebody, whether it be through store finance or any other format, and you can see they’re struggling to pay their $500 mobile phone bill, then chances are they are going to more likely face difficulties managing their debt at some stage in the future and that occurrence is less than 12 months away.”

Smaller debts are a significant issue, with smaller bills up to $200 representing a quarter of debts pushing consumers into default problems.

But the bigger issue, Karmelich argues, is that businesses are forgetting the hard lessons learned during the financial crisis and are allowing cashflow issues to take hold. He says the consumer debt issues are a warning that SMEs need to get back on track.

“When all the problems occurred during the GFC, businesses became better at managing their cashflow. They’re taking their eye off the ball and I think those businesses that have poor disciplines in place around basic cashflow are at risk of this higher debt.”

The research also found that men had higher debt values than women, and younger people aged up to 24-years-old had the highest debt values of any age group – 143% higher than those aged over 65. Karmelich says businesses should note this well.

“The younger generation of today is more credit active than any other generation before them. Many of them are borrowing money for tertiary education, and along with the prevalence of bills being paid for after use, young people are exposed.”

“Many have the benefits of credit but need to think seriously about the credit they are applying for and understand the consequences of not paying.”