Aussie small businesses "need to be allowed to fail"

by Madison Utley11 Sep 2020

Digital credit agency CreditorWatch has doubled down on the alarm it voiced last month over the rising number of “zombie companies”, or businesses being kept out of administration artificially through external support.

With the government having extended the Safe Harbour measures preventing business insolvencies to December, CreditorWatch has predicted a “tsunami of insolvencies” in January 2021. 

Despite the obvious economic challenges unfolding, business administrations fell 37.1% from July to August and are currently 59% lower than the average across 2019, meaning thousands of businesses are relying on government support to stay afloat.

“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,” said CreditorWatch CEO Patrick Coghlan.

“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.”

Further, payment times across the country have lengthened by a day more to an average of 43 days, meaning businesses are waiting 2.9 times longer to be paid than in 2019.

“With payment times staying stubbornly high, it's clear that the SME sector is struggling to generate cash flow outside of government support, indicating that there is a mountain of trouble behind the curtain of stability,” said CreditorWatch chief economist Harley Dale.

“It sounds harsh, but these businesses need to be allowed to fail so that government focus can be aimed at companies that can stand on their own two feet.

“This is a much bigger cog in the wheel of Australia’s economy than policymakers realise. Winding back Safe Harbour measures, whilst ensuring borderline companies receive the assistance required from restructuring bodies, are crucial to ensuring Australia passes through the next ‘economic gate’ without taking a massive blow at the beginning of 2021.”