While the economy has continued to improve, businesses are still struggling with cashflow issues according to new data showing a higher than average number of debtors defaulting due to insolvency.
New figures from the National Credit Insurance Brokers show claims received against bad debts in February remained higher than the average by 38%.
While fewer claims were received than the same time last year, in February 2010 a total of 86 claims were made through NCI against defaulted debtors.
The building and hardware industry has been hit the hardest, with $945,712 worth of debts defaulted on, followed by advertising at $638,158 and timber at $433,249.
Major steel followed with $425,534, followed by electrical at $249,696, air conditioning at $235,382, automotive at $185,300 and computers/electronics at $123,215.
Oxford Funding chief executive Rob Lamers says a number of debtors are defaulting due to lags from the global financial crisis – especially within the building and construction industries.
“These industries had high levels of insolvency anyway, and I think the specific difficulties those industries had were magnified during the financial crisis. We’ve seen a lot of activity being cut there, so of course there are going to be debt problems.”
“With advertising I would draw the conclusion that when things get a little tight, marketing budgets tend to get slashed and that impacts on revenues. I would have thought that with the economy slowing last year, many marketing budgets would have been cut. It hurt a lot of businesses.”
Lamers says small businesses run into trouble when they don’t undertake due diligence on new customers, and don’t take part in appropriate credit checks.
“Maybe that is part of being too eager for the sale, because a lot of businesses have been under pressure and then they are extremely happy to see something. But that often puts them in trouble, and is going to compromise their business as a whole if they don’t undertake that diligence.”
Lamers warns small businesses to take part in appropriate credit checks and see what trends are showing in the data, such as a high level of enquiries into debts and any defaults. He also says to check credit reports with reference checks, “although when you are kept down by limited financial information it can be difficult”.
“There are also significant things to watch for. Look at slowdowns in payment histories, which are particularly important because if you see customers paying at an average of 35 days and that stretches out to 40 or 45, it’s a critical aspect to watch.”
“Additionally, watch the level of disputes. If they are disputing goods or so on as a method of delaying payments, that’s something to watch for. Be aware of the people you’re dealing with, because business management is an issue a lot of SMEs don’t understand.”
Lamers also warns businesses not to keep too much risk associated with one or two customers, saying that would allow one bad debt to impact the business and effectively have one customer control your finances.
“Don’t be too reliant on the one customer, which goes back to just not having your eggs in one basket. Have a range of customers you deal with, spread your risk around so one bad debt doesn’t bring you down.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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