Threat of insolvency lingers over small businesses

Small businesses remain at risk from insolvency despite increased optimism in the wake of the global economic downturn, a new report has warned.

Sixty per cent of 314 global financial institutions, including banks and insurance firms, surveyed by Norton Rose said that the viability of many small firms is still at risk.

The Norton Rose report says liquidity is viewed as the greatest risk to business prospects, which defies expectations from six months ago.

In January, more than 50% of respondents indicated they were seeing a return to liquidity. Just over six months on the outlook is less optimistic, with 80% of Australian respondents, and 75% globally, believing it will be at least 18 months before liquidity returns to pre-crisis levels.

The report warns that start-ups in the retail and real estate sectors are particularly vulnerable in the coming year.

In Australia, respondents believe the global financial recovery will be long and shallow. Steven Palmer, insolvency and restructuring partner at Norton Rose, says: “The next 12 months will see a significant number of mid-sized corporate insolvencies in Australia. I suspect we have already seen most of the very large collapses, although I have little doubt that there may be a couple more to come”.

“A lot of long-term problems have been financed (or refinanced) on a short-term basis. There is still significant pressure in a number of sectors including retail, aged care, property and infrastructure.”

“There is continued upward pressure on interest rates, and while the new found strength of the Australian dollar may deliver a windfall to some, it will be catastrophic for others, particularly if they have not hedged adequately.”

According to IPA, 24,000 bankruptcies occur in Australia each year, with 8,000 of them being corporate administrations, affecting 400,000 people nationally.

Australian respondents view their own economic growth as stable, however their expectations for global recovery are less optimistic. Thirty six per cent of Australian respondents believe recovery in the global economy will involve a double-dip recession.