Late Payments, Cash Crunch Surge as Businesses Suffer Impact of COVID-19

Late payments surged to an average of 49 days in June, according to CreditorWatch’s latest data. In comparison, debtors paid within 11 days for the same month last year. This is not surprising as COVID-19 has reportedly affected 70% of Australian small, medium, and large businesses.

Late Payments, Cash Crunch Surge as Businesses Suffer Impact of COVID-19

The increase in late payments suggests several things. This could mean an increase in administration proceedings once the government lifts the moratoriums on insolvent trading laws. This also suggests a decrease in cash flow causing businesses to struggle with their payment terms. Two-thirds of companies experienced revenue decline in June, according to a report by the Australian Financial Review. Businesses say their cash on hand would allow them to survive less than three months, the AFR said.

Banks can extend lifeline or pull the plug 

Banks play a crucial role in determining whether to extend the lifeline of these businesses or pull the proverbial plug.  

Patrick Coghlan, CreditorWatch chief executive, likened the possible scenario to that of a triage for banks. “The patients in the hospital, there’s a lot of patients and the banks have got to work out who needs the attention, who’s most likely to survive,” Mr Coghlan said. 

Banks have intimate knowledge of businesses because it is their responsibility to conduct due diligence upon their client. We have previously discussed in this article three things a business should do to avoid late payments and defaults. Defaults are indicators of insolvency. 

Mr Coghlan said banks need to make tough early decisions in order to flatten the curve for ill companies. Even if the government keeps on providing targeted support, the bank will still have to make the decision to either extend the lifeline or pull the plug. 

“To be honest, I think that if that occurs, that would probably give us a much smoother curve in terms of insolvency happening over a longer period of time,” he said. 

“I think the banks are saying now, ‘We know there’s a lot of companies out there that shouldn’t be operating. [Those companies] should be speaking to us now or they should be speaking to a restructuring specialist or insolvency practitioner and winding up their business.’” 

Further interest deferrals, extended moratoriums 

The AFR said major banks have extended interest deferrals on more than 700,000 loans, totaling $260 billion, by another four months. The Australian Banking Association said that in June banks granted repayments holidays to 762,766 loans. Of these, 476,728 were mortgages and 214,383 were business loans. 

The deferrals will likely decrease as lenders try to encourage clients to resume payments. However, the Australian Prudential Regulation Authority (APRA) and the Department of Treasury foresee many borrowers still requiring further extension of interest deferrals. This would mean late payments are still likely to be the “new normal” in the next weeks or months.

Federal Treasurer Josh Frydenberg has also signalled a further extension to the moratorium on insolvent trading laws and support measures such as JobKeeper. 

Mr Coghlan said these moves would help the banks nurse critical companies for longer, while at the same time allowing them to make some tough decisions on those that are not going to go the distance. 

“There’s a whole bunch of companies out there now that haven’t gone into administration that normally would have. The banks know that all these companies just simply shouldn’t be trading anymore,” Mr Coghlan said. 

“The banks will say, ‘We don’t want to prop them up anymore.’ We need to start finding those that don’t have a future, as harsh as that sounds, that need to be put into administration and liquidated sooner rather than later instead of having this zombie company for months on end. 

“The longer [those zombies] are around, the more debt the banks are actually running up.” 

Companies face pressure from taxpayers 

Mr Coghlan suspects that companies relying on government support will soon face pressure from taxpayers. National Australia Bank CEO said they have started doing check-ins with customers as to their current situation and reviewing if they can repay the loans. 

“You will have companies sort of pivoting and saying, ‘Well, I’m in that industry now or technically I’m not registered as a hospitality business, but I’m really, you know, producing alcohol.’ You just get these basic issues of actually trying to identify which industries to protect.” 

Mark Hand, ANZ’s group executive for retail and commercial banking, cautioned there was still a lot of uncertainty about the trajectory of the economic recovery. 

“There are still so many unknowns about what will happen next. We will need to wait to see what other government support mechanisms are coming down the pipeline,” he said. 

Act with urgency

Even with the moratorium on insolvent trading laws still in place, Slater Byrne Recoveries suggests acting with urgency. Make frank conversations with your debtors regarding payments and their ability to pay. Late payments are indicators of financial problem. You should see this as a signal to act with immediacy. It is best to get paid as soon as possible before companies go into administration where it would be difficult to recover bad debts. We also suggest acting with compassion in dealing with debtors as we know how difficult the past months have been. 

Photo by KOBU Agency on Unsplash

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