Collapses will keep coming

The bad news on SMEs collapses is set to continue. Two week ago we reported that insolvencies hit the second-highest level since the 1980s in August and today we report on three more businesses that are now in the hands of the corporate undertakers.

There are very different reasons behind the collapses of Tony Bilson’s restaurant business, Wayne Ormond’s mortgage broker business Refund Home Loans and investment firm GR Finance.

In the case of Bilson, poor management appears to have led to a “surprise” payroll tax bill of $500,000 somehow sneaking up on the top chef.

In the case of Ormond, the banks appear to have pulled back from funding the Queensland-based business, particularly after the floods in January.

In the case of GR Finance, the business appears to have failed as a result of dud loans to property developers and business owners.

It is of course ironic that SMEs are collapsing three years after the worst of the GFC ripped through the economy.

That entrepreneurs should be falling over now, when the economy is headed towards a (though still weak) recovery doesn’t quite seem right. But this is what usually happens in a downturn.

The first wave of a downturn hits the big companies that are heavily in debt (think ABC Learning and Allco), the second waves hits the mid-sized companies that have some debt and then are hit by a consumer slowdown, and the third wave hits SMEs and households as consumers shut their wallets and, usually, unemployment starts to rise.

Though the broad theory has held since the GFC, things are a little different this time around. For example, while consumers have shut their wallets, unemployment has remained low throughout the GFC and post-GFC period.

But the major difference has been the behaviour of the Australian Taxation Office. In the midst of the crisis, the ATO were frankly brilliant in their support for small businesses, assisting companies with tax debts with interest-free arrangements and payment plans.

That helped countless businesses come through the worst of the downturn, but with the GFC over and Government finances still relatively fragile, the ATO has increased the pressure on SMEs which took advantage of the Taxman’s empathy to pay back their debts.

You can understand the ATO’s motives – SME debt increased from $12.15 billion in 2008-09 to $14.7 billion in 2009-10.

But the ATO’s recovery actions are taking place at the same time that bank finance remains tight and consumer spending is poor – much lower than it was during the GFC for example, when a $900 cash handout boosted disposable income.

The ATO’s actions during the GFC undoubtedly saved businesses and probably delayed the second wave of SME collapses described above.

But just like in Europe, we’re learning that just because the crisis is over doesn’t mean the underlying problem is solved.

And you can’t escape deleveraging – by businesses, by households, by banks, by the whole global financial system – without casualties.