Are zombie firms on the rise? Payment times blow out amid insolvency protections

Payment times for small businesses are expanding as creditors struggle to chase up debts amid an extension in COVID-19 insolvency protections, according to new data.

Digital credit bureau CreditorWatch says some businesses are now waiting nearly three times as long to get paid compared to this time last year, particularly in industries such as financial and administrative services.

The figures are drawn from activity across the company’s platform, which shows credit inquiries have increased for four straight months, up 7.5% in August.

CreditorWatch chief executive Patrick Coghlan, an outspoken critic of the federal government’s insolvency protections, says the number of so-called “zombie businesses” across the Australian economy is growing.

“Whilst Safe Harbour legislation was critical in stabilising the Australian economy as it went into recession, the measures are now becoming counterproductive because they are propping up companies that should be allowed to fail,” he said in a statement.

“By extending the moratorium to December, the government is wasting taxpayer money by kicking the can down the road.

“It means that solvent businesses are having to trade with otherwise insolvent debtors, risking their own health, whilst doomed businesses are able to put off paying creditors or even the ATO.”

While some businesses are suffering longer payment times, other industries have seen a contraction in terms, according to the figures.

Businesses in the mining, agriculture and utilities sectors have experienced a slight fall in payment terms, although this is dwarfed by the longer payment times being experienced by those in other parts of the economy.

Earlier this week, Treasurer Josh Frydenberg extended measures protecting businesses from creditors during the COVID-19 pandemic until the end of the year.

The measures essentially make it more difficult for creditors to pursue businesses for outstanding debts, leading to a sharp decline in insolvency proceedings in recent months.

The number of companies that have fallen into external administration has tanked since the insolvency protections were introduced in March, with the latest ASIC figures revealing a 56% decrease year-on-year in July.

Frydenberg’s extension was welcomed by small business ombudsman Kate Carnell, who said there are still many companies affected by coronavirus trading restrictions.

“Deloitte Access Economics modelling estimates about 240,000 small businesses are at risk of failure, highlighting the critical need for small businesses to sit down with their trusted financial adviser for a viability assessment,” Carnell said in a statement.

“My office continues to recommend the establishment of a small business viability voucher program, where small business owners facing financial stress can obtain a voucher valued up to $5,000 to access tailored advice on the state of their business.”

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