The true impact of late payments on SMEs

by Greg Charlwood30 Mar 2020

Dark clouds are looming on the horizon for the Australian SME industry as recent payment default numbers hint at an increase in business insolvencies in 2020.

But this potentially represents a significant business opportunity for brokers, who can help SMEs minimise their exposure to payment defaults through alternative sources of finance.

Payment defaults on the rise

Data for Q4 2019, from the Small Business Risk Review published by the CreditorWatch, reveals a 30% year-on-year increase in payment defaults.

The industries most heavily impacted by the rise in payment defaults were healthcare and public administration and safety, which recorded increases in payment defaults of 79% and 73% year-on-year respectively.

Other industries to feel the pain of defaults were transport (a 64% increase year-on-year), and rental, hiring and real estate services (a 61% increase year-on-year).

Payment defaults are the ‘canary in the coalmine’ for SMEs. They are a strong indicator of the likelihood of a business going into administration.

According to CreditorWatch, 50% of companies that incur a payment default go into administration within 18 months.

Figures from ASIC have also revealed that 8,105 businesses entered external administration in the 2018/19 financial year, with businesses in NSW and Victoria accounting for more than 60% of those. This was up from the 7,747 businesses that entered external administration in 2017/18.

The CreditorWatch report also noted that court actions arising from payment defaults had increased 9% year-on-year nationally, with the major increases in SA (57%), NSW (39%) and WA (33%).

Ultimately, payment defaults and administration are caused by businesses  not having the cash available to pay their creditors. And late payments are a primary cause of cash flow interruptions.

According to CreditorWatch, the average late payment time across the 2018/19 financial year was 23 days – that’s more than seven weeks after the invoice issue date. This represents more than $7bn in working capital that Australian businesses are denied access to.

There are a number of cash flow finance options available to SMEs to mitigate the effects of late payments, without personal property being required as security

Worst offenders

The CreditorWatch report revealed the administration and support services sector to be the worst offender when it came to late payments, with an average of 90 days to payment for Q4 2019.

This was followed by rental, hiring and real estate services (66 days), construction (64 days) and financial services (63 days).

The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Review of Payment Terms, Times and Practices was released in March 2019 and showed the impacts of late and extended payments on SMEs.

ASBFEO reported that 45% of SMEs recorded more than 10 outstanding invoices per month. Furthermore, more than half said asking for payment twice was normal. However, 35% said asking for payment two to four times was normal and 12% said four to eight times was normal.

The ASBFEO report also noted some severe flow-on effects of late payments on SMEs, including one in four experiencing difficulties in meeting tax obligations and one in five unable to undertake business expansion or take on additional work. Late payments also restricted growth initiatives such as digital transformation of businesses and improvement of supply chain efficiency.

What can brokers do?

So, what can you do, as a broker, to help your SME clients protect their businesses from the impacts of late payments and perhaps even administration?

There are a number of cash flow finance options available to SMEs to mitigate the effects of late payments, without personal property being required as security. In fact, the ASBFEO report “acknowledge[d] the value of many forms of supply chain finance such as invoice financing”.

Australian Invoice Finance – an Australian debtor finance and invoice finance company providing cash flow finance support to businesses – is a specialist in funding SMEs experiencing financial difficulty, particularly those with late-paying debtors.

Under our invoice finance process, up to 90% of the value of outstanding invoices, up to $3m, is converted to cash, usually within 24 hours. Once the outstanding invoice is paid, the remaining 10% of the value of the invoice is transferred to you.

Importantly, we also work with small business owners to help them better manage their cash flow over the long term.

Greg CharlwoodGreg Charlwood
Managing director at Australian Invoice Finance